What is enterprise value?
Enterprise value is the total cost to acquire a business outright. It is market capitalization plus total debt minus cash and equivalents.
It is a more complete measure than market cap. Buying a company means taking on its debt and gaining its cash, so enterprise value captures the real economic price in a way the share price alone does not.
The enterprise value formula.
Enterprise value = market cap plus total debt minus cash and equivalents. Debt is added because an acquirer assumes it; cash is subtracted because an acquirer effectively receives it.
That cash adjustment is what trips people up. Two companies with the same market cap can have very different enterprise values if one is loaded with debt and the other with cash.
A worked example.
A company has a 100,000,000 market cap, 20,000,000 in debt, and 10,000,000 in cash. Enterprise value is 100,000,000 plus 20,000,000 minus 10,000,000, which is 110,000,000.
Why enterprise value matters.
It is the basis for valuation multiples that compare companies fairly, because it normalizes for differences in debt and cash. A multiple built on enterprise value, like EV/revenue or EV/EBITDA, compares the cost of the whole business, not just its equity. That is why acquirers and analysts lead with it.
Enterprise value is the numerator; revenue or earnings is what it gets measured against. Reading it next to the recurring revenue being valued connects the price to what is being bought.
How it is used.
Pair enterprise value with a revenue or earnings figure to form a multiple, then compare that multiple to similar companies. On its own it is just a price; in a multiple it becomes a valuation.
For a SaaS business, the multiple that price commands is set largely by growth and efficiency, which is the case for building the growth multiples reward.