Enterprise value is the price of the whole business rather than the price of its shares. Buy every share of a company and you also take on its debt and acquire its cash; enterprise value is what you are really paying once both are accounted for.
The difference from market capitalisation matters most where balance sheets differ. Two companies with identical share prices and identical earnings are not equally priced if one is debt-free and the other carries borrowings worth half its market value — and every multiple built on market capitalisation alone will insist that they are.
Debt less cash is net debt, so the same statement reads EV = market capitalisation + net debt. Where a company holds more cash than debt it is in a net cash position and its enterprise value is below its market capitalisation. Fuller definitions also add minority interests and preferred stock, which matter for conglomerates and rarely for anything else.
Two companies, each with a market capitalisation of $5bn and $500m of EBITDA:
On P/E or price-to-sales these two would look broadly alike. On enterprise value one is nearly twice as expensive as the other, and the reason is sitting on the balance sheet rather than in the share price.
Use it as the numerator whenever the denominator is a figure available to all providers of capital: EBITDA, EBIT and revenue are earned before lenders are paid, so pairing them with market capitalisation mismatches the two halves of the ratio. Net income is what is left after interest, which is why P/E correctly uses market capitalisation.
Read it beside net debt / EBITDA. Enterprise value says how much of the purchase price is borrowings; that ratio says whether the borrowings are comfortable.
In the app, EV/EBIT is one of the key metrics on a company page, and EBITDA is the one lens on the Fair Value tab that values the whole business rather than the equity — its fair value has to come back through the balance sheet before it can be quoted per share.
It is essential when comparing companies with different capital structures, when looking at anything acquisition-shaped, and in capital-intensive industries where debt is the norm. It also quietly rescues the cash-rich company: a business whose cash is a third of its market value screens as expensive on P/E and reasonable on EV multiples, and the second reading is the more honest one.
It treats all cash as available, which is rarely true — some is trapped offshore, some is working capital the business cannot run without, and some is already earmarked. It uses book values for debt, which can be far from what the debt is worth. It ignores obligations that do not appear as debt, such as pension deficits and certain leases, and for banks and insurers it is not meaningful at all: for them debt is raw material rather than financing.