What Is Total Enterprise Value (TEV)?

Total enterprise value (TEV) is a valuation measurement used to compare companies with varying levels of debt. It includes not only a company's equity value but also the market value of its debt while subtracting out 澳洲幸运5官方开奖结果体彩网:cash and cash equivalents.

TEV is considered a more comprehensive alternative to 澳洲幸运5官方开奖结果体彩网:market capitalization and is commonly used to calculate the cost of a target company in a takeover.

Understanding Total Enterprise Value (TEV)

Some financial analysts use market capitalization analysis to derive the value of a company. Market capitalization is the value of a company by multiplying the current stock price by the total number of outstanding shares. However, since companies often have different financial and 澳洲幸运5官方开奖结果体彩网:capital structures, TEV is generally considered to be a better value measure when comparing companies with different levels of debt and equity.

TEV is the overall economic value of a company. It is the value of the operating entity. This operating entity is funded by common stock, preferred stock, debt and cash and so the value of the entity can be calculated by summing up all the financing sources sustaining the business. TEV is particularly helpful when companies engage in 澳洲幸运5官方开奖结果体彩网:mergers and acquisitions (M&A). If an acquiring firm is interested in a company, it would need to know how much debt the target company has on its 澳洲幸运5官方开奖结果体彩网:balance sheet.

The acquiring firm might need to pay off the debt as part of the takeover. Also, if the acquiring firm had debt on its balance sheet, it would be critical to know the amount of outstanding debt for the 澳洲幸运5官方开奖结果体彩网:target company since it could impact whether or not the deal gets done. 

Calculating Total Enterprise Value (TEV)

TEV is calculated as follows:

• $TEV = market capitalization + market value of debt + preferred stock - cash and cash equivalents$TEV=marketcapitalization+marketvalueofdebt+preferredstock−cashandcashequivalents

Market capitalization is added to the company's total amount of debt. Preferred stock is also added because it is a hybrid security, which has features of equity and debt. Preferred shares are treated as debt because they pay dividends and have a higher priority when it comes to claiming earnings versus common stock. Also, preferred shares are repaid similar✤ to debt in the event of an acquisition.

Cash and cash equivalents, meanwhile, are subtracted from the formula because they reduce the cost of acquiring the company. Cash equivalents may consist of short-term investments, 澳洲幸运5官方开奖结果体彩网:commercial paper, money market funds, and 澳洲幸运5官方开奖结果体彩网:marketable securities with a maturity date of 90 days or less.

Total Enterprise Value (TEV) vs. Market Capita🌠lization

Often, two companies that seem to have similar market ca🀅pitalizations have ver🐽y different TEVs.

For example, if a company was trying to compare its value to the value of a competitor, it would have to look beyond market capitalizations. Let's say that the competitor has a market capitalization of $100 million but has $50 million in debt. The company conducting the comparison might also have a market cap of $100 million but might instead have no debt and $10 million cash on hand. Based on TEV, the cost to purchase the competitor would be $150 million, whereas the company conducting the comparison would cost $90 million.

Now let's say that instead of a comparison to a competitor, the company was looking to acquire the competitor. Using the market capitalization value, we would say that the takeover price for acquiring the company is worth $100 million.

However, TEV shows that the cost of acquisition is really $150 million, due to the debt of $50 million in addition to the $100 million market cap. It's important to remember that the acquiring company would be buying the target company's debt as well as its assets.

Uꦬsin𝓰g Total Enterprise Value (TEV) to Normalize Values

The TEV, in addition to being a metric for comparing potential takeover candidates, also allows a company or fin🐻ancial analyst to normalize the valuation of a company.

Many financial analysts use the price-to-earnings (P/E) ratio, which measures a company’s share price relative to its 澳洲幸运5官方开奖结果体彩网:earnings per share (EPS), to derive a company's value, abo🎐ve and beyond its market capitalization. However, a company's P/E ratio does not always provide a complete picture since it only includes the market capitalization and profits (or earnings) of the company. P/E ratios can make a company appear expensive compared to another company when, in reality, that might not be the case should one have a lot of debt on its balance sheet while the other is flush with cash.

Financial analysts can normalize a company's valuation by taking the EBITDA (earnings before interest, tax, depreciation, and amortization)-to-澳洲幸运5官方开奖结果体彩网:enterprise value. The enterprise value-to-EBITDA metric, also known as EV/EBITDA, allows the stock price of 澳洲幸运5官方开奖结果体彩网:public companies to be better evaluated for investment purposes. The reason for this is that the calculation includes the components of the P/E ratio, such as profits and market capitalization, as well as all of the components in the TEV calculation such as total debt.

The Bottom Line

Total enterprise value (TEV) is one of many useful tools to value companies and noꦰt just for M&A purposes, either. This metric better enables investors to compare companies with different capital structures and get a greater sense of which one is potentially undervalued by the market.