Enterprise Value

What is Enterprise Value?

So as we said in that last lesson, enterprise values a more comprehensive metric to look at than just the market capitalisation alone.

Let’s take a look at enterprise value and what we need to do is work out what our market cap is, which is outstanding shares multiplied by the value per share and then we add on the debt that that business has on its books today. But we take off any of the cash that it might have lying around at the bank to give us a total picture of the acquisition cost of that business.

Who uses Enterprise Value?

Why is this important? Well, boards and other financial investors use this to make decisions on investments and whether or not they should acquire a company. And if we can relate our data work to the enterprise value, how much is that boosting the value of our company by it makes it much easier for those senior people to understand the value of our work.

A real-world example: McDonald’s vs Shake Shack

So let’s make this practical, and we’ll go back to McDonald’s as an example here that we can use to understand it.

At the time of recording, McDonald’s had 247 dollars and ten cents as a value per share. And if we look at one of their competitors, Shake Shack was only worth $78.28 per share.

Market Capitalisation

So what else do we need to know? Well, here we can compare them side by side, and you can see here that the market capitalisation..

And Yahoo Finance has done the sums – for McDonald’s is 184.15 Billion, whereas obviously, the smaller Shake Shack is only 3.19 Billion. That gives us more understanding of the value of these businesses than the share price alone.

Enterprise Value

Beneath that, they’ve also calculated enterprise value. And again, you can see how that differs from the market capitalisation because of the fact we have to add on the debt and take away the cash from these businesses. But what you can also see down at the bottom is that there is a relationship between the enterprise value of the businesses and their revenue, and there’s a relationship between the enterprise value and their profitability, or EBITDA.



Linking Enterprise value with the value of data



We will come back to how we use these metrics later on. All you need to know right now is that they are important and they’re a way that we can look at cost reduction and revenue enhancements and translate that into enterprise value, which is a number that board members and the C-suite should really care about.