Equity value measures the value of a company attributable to share holders. But a company may also have debt investors, bondholders or other debt providers. Debt is an important component of the overall capital structure.
EV = Market Cap + Net Debt
Enterprise value or EV represents the value of a company from the persepctive of all capital providers and is calculated by adding market cap and net debt, where net debt equals all interest bearing debt minus cash and cash equivalents.
Think of EV as the theoratical takeover price of the company. When a company is being taken over, the acquiror has to compensate the target’s shareholders and either assume or pay down any debt on the target’s balance sheet. That is why, equity value and debt are added to get EV. In the same vein, the buyer has access to any cash or cash equivalents available on the target’s balance sheet which reduces the overall cost of acquisition. That is why cash and cash equivalents are subtracted while calculating EV.
EV/Revenue is a good multiple for valuing startups, as they tend to have operating losses in the initial years and their EBIT, EBITDA or earnings are likely to be negative. The flip side of using revenue multiples is that revenue in itself does not give any indication of profitability.
EV/EBITDA is the mostpopular EV multiple and is widely used for valuing companies across sectors. EBITDA stands for Earnings before Interest Tax Depreciation and Amortization. Though the EBITDA multiple is very popular for capital intensive businesses, it finds widespread application across a range of industries, since it is capital structure neutral and not impacted by differences in accounting policies related to depreciation & amortization.
EV/ EBIT multiple is useful for less capital intensiveindustries where the d&a burden is likely to be less significant.