what does ev tell you 
enterprise value ev differs significantly from simple market capitalization in several ways and many consider it to be a more accurate representation of a firm s value ev tells investors or interested parties a company s value and how much another company would need if it wanted to purchase that company there is one other consideration a company s ev can be negative if the total value of its cash and cash equivalents surpasses that of the combined total of its market cap and debts this is a sign that a company is not using its assets very well it has too much cash sitting around not being used extra cash can be used for many things such as distributions buybacks expansion research and development maintenance employee pay raises bonuses or paying off debts market capitalization is not intended to represent a company s book value instead it represents a company s value as determined by market participants ev as a valuation multipleenterprise value is used as the basis for many financial ratios that measure the performance of a company for example the enterprise multiple contains enterprise value it relates the total value of a company from all sources to a measure of operating earnings generated the earnings before interest taxes depreciation and amortization ebitda ebitda measures a company s ability to generate revenue and is used as an alternative to simple earnings or net income in some circumstances ebitda however can be misleading because it strips out the cost of capital investments like property plant and equipment another figure ebit can be used as a similar financial metric without the drawback of removing depreciation and amortization expenses related to property plant and equipment pp e ebitda calculates a company s income before interest taxes depreciation and amortization ebitda is calculated using the following formula the enterprise multiple ev ebitda metric is used as a valuation tool to compare the value of a company and its debt to the company s cash earnings less its non cash expenses as a result it s ideal for analysts and investors looking to compare companies within the same industry ev ebitda is useful in several situations ev ebitda has a few drawbacks another commonly used multiple for determining the relative value of firms is the enterprise value to sales ratio or ev sales ev sales is regarded as a more accurate measure than the price sales ratio since it considers the value and amount of debt that a company must repay at some point it s believed that the lower the ev sales multiple the more attractive or undervalued the company is the ev sales ratio can be negative when the cash held by a company is more than the market capitalization and debt value a negative ev sales implies that a company can pay off all of its debts enterprise value vs market cap