what is total enterprise value tev 
total enterprise value tev is a valuation measurement used to compare companies with varying levels of debt it includes not only a company s equity value but also the market value of its debt while subtracting out cash and cash equivalents tev is considered a more comprehensive alternative to market capitalization and is commonly used to calculate the cost of a target company in a takeover investopedia yurle villegasunderstanding total enterprise value tev some financial analysts use market capitalization analysis to derive the value of a company market capitalization is the value of a company by multiplying the current stock price by the total number of outstanding shares however since companies often have different financial and capital structures tev is generally considered to be a better value measure when comparing companies with different levels of debt and equity tev is the overall economic value of a company it is the value of the operating entity this operating entity is funded by common stock preferred stock debt and cash and so the value of the entity can be calculated by summing up all the financing sources sustaining the business tev is particularly helpful when companies engage in mergers and acquisitions m a if an acquiring firm is interested in a company it would need to know how much debt the target company has on its balance sheet the acquiring firm might need to pay off the debt as part of the takeover also if the acquiring firm had debt on its balance sheet it would be critical to know the amount of outstanding debt for the target company since it could impact whether or not the deal gets done tev is often seen as a more comprehensive way to value a company since it factors in debt and cash which have a significant impact on a company s financial health and value calculating total enterprise value tev tev is calculated as follows 1market capitalization is added to the company s total amount of debt preferred stock is also added because it is a hybrid security which has features of equity and debt preferred shares are treated as debt because they pay dividends and have a higher priority when it comes to claiming earnings versus common stock also preferred shares are repaid similar to debt in the event of an acquisition cash and cash equivalents meanwhile are subtracted from the formula because they reduce the cost of acquiring the company cash equivalents may consist of short term investments commercial paper money market funds and marketable securities with a maturity date of 90 days or less total enterprise value tev vs market capitalizationoften two companies that seem to have similar market capitalizations have very different tevs for example if a company was trying to compare its value to the value of a competitor it would have to look beyond market capitalizations let s say that the competitor has a market capitalization of 100 million but has 50 million in debt the company conducting the comparison might also have a market cap of 100 million but might instead have no debt and 10 million cash on hand based on tev the cost to purchase the competitor would be 150 million whereas the company conducting the comparison would cost 90 million now let s say that instead of a comparison to a competitor the company was looking to acquire the competitor using the market capitalization value we would say that the takeover price for acquiring the company is worth 100 million however tev shows that the cost of acquisition is really 150 million due to the debt of 50 million in addition to the 100 million market cap it s important to remember that the acquiring company would be buying the target company s debt as well as its assets tev is a more accurate measure for valuing the price of a company during a merger or acquisition as it represents the cost to purchase the company using total enterprise value tev to normalize valuesthe tev in addition to being a metric for comparing potential takeover candidates also allows a company or financial analyst to normalize the valuation of a company many financial analysts use the price to earnings p e ratio which measures a company s share price relative to its earnings per share eps to derive a company s value above and beyond its market capitalization however a company s p e ratio does not always provide a complete picture since it only includes the market capitalization and profits or earnings of the company p e ratios can make a company appear expensive compared to another company when in reality that might not be the case should one have a lot of debt on its balance sheet while the other is flush with cash financial analysts can normalize a company s valuation by taking the ebitda earnings before interest tax depreciation and amortization to enterprise value the enterprise value to ebitda metric also known as ev ebitda allows the stock price of public companies to be better evaluated for investment purposes the reason for this is that the calculation includes the components of the p e ratio such as profits and market capitalization as well as all of the components in the tev calculation such as total debt 