REVISED MARCH 11, 2018: We've been asked recently about the concept of Enterprise Value and how it is calculated. Briefly, Enterprise Value attempts to calculate the value of the operating business of a firm without regard to its capital structure or (ideally) other non-operating factors like an unusually large cash balance.
Here are the two formulas we typically use for public companies.
1 - Enterprise Value = (Outstanding Shares * Current Stock Price) plus Debt (long and short term, including capital leases) less cash & marketable securities. [UPDATE 9/8/10: We changed our calculation to subtract off cash and marketable securities as noted. UPDATE 3/11/18: We're no longer using fully diluted shares and option exercise proceeds in the calculations.]
2 - Enterprise Value = (Outstanding Shares * Current Stock Price) less Current Assets plus Total Liabilities. (UPDATE 3/11/18: We're no longer using fully diluted shares and option exercise proceeds in the calculations.)
While the formula many use is probably something similar to #1, we also look at #2 as some companies have unusual balance sheet items that can distort the result of #1. #2 may also be more applicable when you are trying to look at valuations for asset purchase transactions where the bulk of current assets and total liabilities are left behind with the seller (as in hosting.) It is also important to keep an eye on the amount of un-exercised, in the money options as these can distort valuation as well. Circumstances may dictate using a hybrid formula to ensure a logical result.
As always, if you have any questions please do not hesitate to contact us.
Author: Hillary Stiff, Managing Director of Cheval Capital. Hillary has been an investment banker and CFO, completing M&A transactions and arranging financing for a number of companies including NTT/Verio, The Endurance International Group and Web.Com among many others. She has helped complete over 250 successful web hosting, ISP and related transactions and distributes a list of hosting and related companies that are for sale.
Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell the stocks mentioned above, a comprehensive discussion of valuation or how to do the calculations discussed. Please be sure to consult your financial advisors when valuing your company, considering the sale of your business or making other financial decisions.