Total enterprise value, or TEV, is a company's market capitalization plus net debt.
Okay, let’s untangle that.
Market capitalization is the total number of shares a company has multiplied by the price per share. That’s the market equity value of the company. The equity value is what investors perceive to be the current value of earnings (value after all parties are paid) for the long-term.
Net debt is the total debt outstanding minus cash. So it’s all of the debt that would exist if the company suddenly lost all of its cash. Most companies have net debt. Some companies, like Apple (AAPL) - Get Apple Inc. (AAPL) Report, have more cash than debt, so they have net cash.
So when you add equity value and net debt, you get total enterprise value, which is just the total value the company is providing to all financial asset holders. Those are equity holders, or shareholders and debt holders, or bond holders.
And when investors and analysts assess a company’s equity value, they usually don’t subtract net debt until the final year of their valuation. In the last year of projections, they subtract net debt from their projected total enterprise value to get their projected equity value, or value remaining for shareholders.
So what does TEV really tell us?
It tells use how a company is capitalized, or what its capital structure is. Its capital structure tells us how much the company is financed with equity versus with debt.
So let’s say we have a company that has a market capitalization of $100 billion and net debt of $200 million. It has a TEV of $1.2 billion, a value that is comprised of 16% debt and 84% equity. That’s a fairly healthy capital structure, as it indicates that investors see a lot of equity value, allowing the company to comfortably pay back its lenders.
In 2020, the coronavirus pandemic has wiped out revenues across many sectors, particularly oil.
To see how this has impacted certain sectors and how to approach your investments, watch the quick video above.