What a buyer actually pays
Market capitalisation prices the shares. Whoever buys the whole company also takes on its debt and receives its cash, and enterprise value adjusts for exactly that. It is the number takeover prices are quoted on and the numerator of EV/EBITDA, the multiple used to compare companies with different balance sheets.
The formula
Worked example: $5,000m market cap, $2,000m debt, $500m cash
- Net debt: 2,000 − 500 = $1,500m
- Enterprise value: $6,500m
Paying $5 billion for the shares means owing $6.5 billion once the lenders are counted. The cash reduces the bill because it belongs to the buyer the moment the deal closes.
Same market cap, very different price
| Market cap | Debt | Cash | Enterprise value | |
|---|---|---|---|---|
| Leveraged | 5,000 | 2,000 | 500 | 6,500 |
| Debt-free with cash | 5,000 | 0 | 1,500 | 3,500 |
On a stock screen the two look identical. As acquisitions, one costs nearly twice the other. Ranking companies by market cap alone gets this backwards, which is the whole reason the measure exists.
Where it is used
EV/EBITDA pairs a capital-structure-neutral value with a capital-structure-neutral profit, so a company financed with debt and one financed with equity can be compared. The P/E ratio cannot do that, because earnings are already net of interest. On the example, EBITDA of $650m gives an EV/EBITDA of 10 — typical for a mature industrial, low for software, high for a utility.
What counts as debt
Interest-bearing borrowings: bonds, bank loans, and since IFRS 16 and ASC 842 the lease liabilities. Trade payables do not count; they are working capital. A full calculation also adds preferred stock, minority interests and unfunded pension deficits, each of which is a claim that ranks ahead of ordinary shareholders.
What this calculator leaves out
Pensions, preferred stock, minorities, and whether the cash is actually available — cash trapped in a foreign subsidiary is not the same as cash in the treasury. Enough for a first read; not enough to price a bid.
Related calculators
- Market cap calculator — where the calculation starts
- EBITDA margin — the denominator of the standard multiple
- Debt-to-equity — how much the debt moves the value