If you bought a company outright, you'd take on its debts and pocket its spare cash. Enterprise value captures that true takeover price — and it's the foundation of the multiples professionals use most.
From market cap to enterprise value
Market cap is just share price × number of shares. Enterprise value adjusts it for the balance sheet:
Enterprise value = Market cap + Total debt − Cash
Example: a company with an $800m market cap, $300m of debt and $100m of cash has an enterprise value of $1bn. You pay for the equity, inherit the debt, and the cash effectively comes back to you.
The main EV multiples
| Multiple | Compares EV to… | Best for |
|---|---|---|
| EV/EBITDA | Pre-tax operating cash earnings | Comparing firms with different debt and tax situations |
| EV/EBIT | Operating profit (after depreciation) | Capital-heavy firms where wear-and-tear is a real cost |
| EV/Sales | Revenue | Young or loss-making firms with no profit yet |
EBITDA means Earnings Before Interest, Taxes, Depreciation and Amortization — a rough proxy for operating cash earnings. It's useful, but because it ignores the cost of replacing equipment, EV/EBIT is often the more honest lens for asset-heavy businesses.
Why not just use P/E?
The P/E ratio uses share price and net profit, both of which are affected by how much debt a company carries. Two identical businesses can show very different P/Es purely because one borrowed more. Enterprise value strips that out, so EV multiples let you compare the underlying businesses fairly.
Watch out: EBITDA flatters capital-intensive companies because it adds back depreciation — a real, recurring cost of running factories or networks. Always sanity-check EV/EBITDA against EV/EBIT and free cash flow.
