Enterprise Value

Q: Can you explain what enterprise value is?

--S.R., Elko, Nev.

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A: Enterprise value represents a company’s economic value--the minimum someone would have to pay to buy it outright. It’s important to consider when you’re valuing a stock. A company’s market capitalization (the current stock price multiplied by the number of shares outstanding) is often used as a proxy for enterprise value, but that ignores debt. Enterprise value is a modification of market cap, incorporating debt.

To calculate enterprise value, add long-term debt (found on a company’s balance sheet) to the market cap and subtract cash and investments (also on the balance sheet).

Let’s examine Sears, using its most recent quarterly earnings report. Its 391 million shares at a recent stock price of $61 yield a market cap of $23.9 billion. To that we add its $14.1 billion in long-term debt and capitalized leases and subtract its $344 million in cash and cash equivalents. The result is $37.7 billion, a significantly higher number than the market cap.

Debt can make a big difference. If you paid $23.9 billion for Sears, you would actually end up with a total bill of $37.7 billion, as the company comes with a lot of debt. The enterprise value reminds all investors, large and small, that long-term debt is a cost to the business.

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Q: I see different folks ringing the New York Stock Exchange opening bell. Have the Fools done this yet? What are the criteria for being chosen?

--A.F., Pueblo, Colo.

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A: The general rule is that the opening and closing bells are reserved for visiting heads of state and senior officers of NYSE-listed companies. There’s no mention of Fools, but we’re sure that’s just an oversight.