Tuesday, December 1, 2009

Fundamental Analysis: Enterprise Value (EV)

In the two previous posts, I discussed about two methods of Technical Analysis for stock investment. Today, let us explore one of the fundamental (Fundamental Analysis) approach to stock investment called Enterprise Value.

Enterprise Value is one of the Investment Valuation ratios. There are some other ratios such as Price/Earnings ratio, Price/Book Value ratio, Price/Sales ratio, Price/Cash Flow ratio and so on. Those ratios will be discussed in the coming post.

Investment Valuation Ratios:

Investment Valuation Ratios are ratios used to identify the fundamental of a company (stock) before making the decision to buy or not to buy. As mentioned earlier, some other ratios are Price/Earnings ratio, Price/Book Value ratio, Price/Sales ratio, Price/Cash Flow ratio and so on.

Enterprise Value can be calculated as follow:

Enterprise Value = Market Capitalization + Debt - Cash

Market Capitalization = No. of Shares Outstanding x Price per share

Enterprise value measures the total cost if someone want to takeover the company by buying all the shares, paying off the debt and take out cash that is left over. A company with large enterprise value means that it is harder to be taken over (acquisition) by other company. In other words, enterprise value measures the value of a company.

By using enterprise value, investors can compare between other companies in the same industry to check whether a company is undervalued or overvalued.

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