What it means
The market value of a company's shares tells you only what shareholders own. A company also has lenders, and it may hold cash, so the full picture needs both.
TEV adds the claims of all capital providers: the market value of the shares, debt, preferred shares and the part of subsidiaries owned by outsiders. It then subtracts cash and similar items, because a buyer who purchases the company also gains that cash.
The result is the price a buyer would effectively pay for the operating business. This makes it a better guide than market capitalisation when comparing companies with different amounts of debt.
TEV is often divided by earnings before interest, tax, depreciation and amortisation, known as EBITDA, to give a valuation multiple. A multiple of 8 times means the business is valued at eight times its yearly operating earnings, and the figure is a common benchmark in deals.
Care is needed with the inputs. Analysts must decide how to treat leases, pension deficits and cash that is trapped in foreign subsidiaries, and different choices can change the result.
TEV is usually treated as the same thing as enterprise value, and some sources use the two terms interchangeably. The label "total" is used to stress that all claims on the business are included.
In practice
Real-world examples.
Example
A corporate development team compares two competitors with different amounts of debt. One has a lower share price but far more borrowing. Looking at TEV rather than market capitalisation shows that the two firms are valued similarly. He also compares each firm's TEV to EBITDA multiple.
Example
A private equity analyst values a target using a multiple of 8 times EBITDA. The target has EBITDA of $30,000,000, so the TEV is $240,000,000. She then subtracts net debt to find the price for the shareholders. The figure forms the basis of her offer.
Example
A founder prepares to sell her company and wants to understand the offers. One bidder quotes a TEV of $60,000,000 and another quotes an equity price of $55,000,000. After adjusting for debt, she sees that the second offer is actually higher. She asks her adviser to build a table comparing the offers on the same basis.
Formula
Calculation
TEV = market capitalisation + total debt + preferred shares + minority interest - cash and equivalents
A company has 50,000,000 shares priced at $16, so market capitalisation is 50,000,000 x 16 = $800,000,000. It has debt of $250,000,000, preferred shares of $50,000,000, no minority interest and cash of $100,000,000.
TEV = 800,000,000 + 250,000,000 + 50,000,000 + 0 - 100,000,000 = $1,000,000,000
If EBITDA is $125,000,000, then TEV / EBITDA = 1,000 / 125 = 8.0 times.Case study
Seen in the real world.
Meridian Packaging is an illustrative, fictional company being considered for acquisition by a larger firm. Its share price implied a market capitalisation of $400,000,000, which looked cheap to the buyer's board.
The finance team calculated TEV by adding $180,000,000 of debt and $20,000,000 of preferred shares and subtracting $40,000,000 of cash. The TEV was therefore 400 + 180 + 20 - 40 = $560,000,000.
With EBITDA of $70,000,000, the TEV multiple was 8 times, in line with similar deals. The board realised that the apparent bargain disappeared once debt was counted, and the illustrative lesson is that equity value alone can mislead. The buyer's board asked the team to present future bids on a TEV basis, so that offers for companies with different capital structures could be compared fairly. The team also noted that cash held overseas might be taxed if brought home, so they ran the calculation twice, once with all the cash and once with only the freely available cash, to see how much the answer moved.
Watch out
Common mistakes.
- Using market capitalisation alone to compare companies with different levels of debt. Debt and preferred shares are claims that a buyer would have to deal with, so ignoring them hides part of the price. The resulting figure can look very different when the borrowing is large.
- Forgetting to subtract cash, which overstates the price of the business. Cash reduces the net price a buyer effectively pays, so leaving it out makes the business look more expensive than it is.
- Comparing a TEV multiple with an equity-based measure such as the price-earnings ratio. Because TEV includes debt, it belongs with operating earnings such as EBITDA, while the price-earnings ratio belongs with equity value. Different analysts also treat leases and pension deficits differently, so it is wise to state the definition used.
Questions
People also ask.
Is TEV the same as enterprise value?
Yes, in most uses the two terms mean the same thing. Some people add the word total to stress that every capital provider is included.
Why is cash subtracted?
A buyer can use the target's cash to repay debt or fund the purchase, which lowers the effective price. Treating cash as an offset is standard practice, though some analysts exclude cash needed to run the business.
Which earnings measure pairs with TEV?
Operating measures such as EBITDA or EBIT are usually used, because they ignore financing costs and match the capital that TEV includes.
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