What is Enterprise Value?

Kevin Cheng

I found the concept of enterprise value quite tricky at first but I attribute this to the confusing terminology that was used to explain it. In short, enterprise value can be thought of as the cost of acquiring a business. What is confusing in some definitions is that they refer to enterprise value as the price (instead of cost) of acquiring a business, which isn’t technically correct as you would not be paying the enterprise value to acquire a business.

If you were to acquire a business, you will be paying the shareholders to buy their shares of the company off them. Hence, you will effectively be paying the market capitalisation of the company to acquire the business. However, once you’ve acquired the business (i.e., acquired the company’s shares), you will have also acquired any outstanding debt in the business. This debt then becomes a liability that you will eventually…

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