What Is Total Enterprise Value (TEV)?

What Is Total Enterprise Value (TEV)?

Let me explain total enterprise value, or TEV, directly to you. It's a method I use to assess a company's value, especially when comparing firms with different capital structures. TEV includes the company's equity value plus the market value of its debt, minus cash and cash equivalents. I find it a more comprehensive alternative to just looking at market capitalization, and it's commonly used to figure out the cost of a target company in a takeover.

Key Takeaways

You should know that TEV is calculated as market capitalization plus interest-bearing debt plus preferred stock minus cash. It helps with valuations of potential takeover targets and determines the amount that should be paid for the acquisition. Overall, TEV derives the complete economic value of a company.

Understanding Total Enterprise Value (TEV)

Some analysts stick to market capitalization to value a company, which is just the current stock price multiplied by the number of outstanding shares. But since companies have varying financial and capital structures, I prefer TEV as a better measure when comparing those with different debt and equity levels.

TEV represents the overall economic value of a company—it's the value of the operating entity itself. This entity is funded by common stock, preferred stock, debt, and cash, so you calculate its value by summing up all those financing sources. TEV is especially useful in mergers and acquisitions. If you're an acquiring firm interested in a target, you need to know how much debt is on its balance sheet—you might have to pay it off as part of the deal. And if you have your own debt, knowing the target's outstanding debt is critical; it could make or break the transaction.

Remember, TEV is often seen as a more comprehensive valuation method because it factors in debt and cash, which significantly impact a company's financial health and true value.

Calculating Total Enterprise Value (TEV)

Here's how you calculate TEV: it's market capitalization plus market value of debt plus preferred stock minus cash and cash equivalents. You add market capitalization to the total debt. Preferred stock gets added because it's a hybrid—part equity, part debt. It pays dividends and has higher priority over common stock for earnings, and in an acquisition, it's repaid like debt.

Cash and cash equivalents are subtracted because they lower the acquisition cost. These might include short-term investments, commercial paper, money market funds, or marketable securities maturing in 90 days or less.

TEV vs. Market Capitalization

You might notice that two companies with similar market capitalizations can have very different TEVs. For instance, if you're comparing your company to a competitor, look beyond market cap. Say the competitor has a $100 million market cap but $50 million in debt, while your company also has $100 million market cap but no debt and $10 million in cash. Based on TEV, buying the competitor costs $150 million, but your company would cost $90 million.

If you're considering acquiring that competitor, market cap suggests a $100 million price, but TEV reveals it's actually $150 million due to the debt. You're buying the debt along with the assets.

Using TEV to Normalize Values

Beyond comparing takeover candidates, TEV lets you normalize a company's valuation. Many use the price-to-earnings (P/E) ratio, which compares share price to earnings per share, but it doesn't always give the full picture since it only includes market cap and earnings. P/E can make one company look expensive compared to another, but that might not hold if one has heavy debt and the other has lots of cash.

Instead, use EBITDA-to-enterprise value, or EV/EBITDA, to better evaluate stock prices for investments. This metric includes P/E components like profits and market cap, plus all TEV elements like total debt.

What Does Total Enterprise Value (TEV) Tell You?

TEV breaks down a company's value beyond market cap by including debts and cash reserves. Think of it as the theoretical total price an acquirer pays to buy the company and settle all claims.

How Do You Calculate Total Enterprise Value (TEV)?

You calculate it as market capitalization plus total debt plus preferred stock minus cash and cash equivalents. Sometimes other factors come in, but these are the basics.

Why Is Cash Subtracted from Total Enterprise Value (TEV)?

Cash reduces the acquisition cost. If a target valued at $100 million has $20 million in cash, the real cost drops to $80 million since you gain access to that cash.

Why Is Debt Added to Total Enterprise Value (TEV)?

Higher debt means higher TEV because it's an extra cost for any acquirer to pay off.

Can a Company Have a Negative Total Enterprise Value (TEV)?

Yes, if it has more cash than its market value and debt combined, making it theoretically an attractive investment.

The Bottom Line

Total enterprise value is one of many tools to value companies, not just for M&A. It helps you compare firms with different capital structures and spot which might be undervalued by the market.