Enterprise value is the total economic value of a company, including its debts and available cash. It reflects what a company truly costs if you were to acquire it entirely. Enterprise value is often used to compare companies fairly with one another. 

Enterprise value shows what a buyer effectively has to pay for the entire company.

When you only look at market capitalization, you see what the shares are worth together. But in an acquisition, you also take on the company’s debts. At the same time, you receive the cash the company has on its balance sheet. Therefore, enterprise value is calculated by adding the market capitalization to the total debt and then subtracting the available cash. This provides a more realistic picture of the company’s total value. Especially for companies with high debt levels or large cash reserves, enterprise value can differ significantly from market capitalization.

Short example:

Suppose company A has a market capitalization of €200 million. In addition, the company has €80 million in debt and €20 million in cash.

If a buyer wants to acquire the entire company, they must not only purchase the shares for €200 million but also assume the €80 million in debt. At the same time, they gain access to €20 million in cash.

The enterprise value is therefore €200 million + €80 million - €20 million = €260 million.

Compare this to company B, which also has a market capitalization of €200 million but only €20 million in debt and no cash. The enterprise value of company B is then €220 million.

Although both companies have the same market capitalization, company A is more expensive to acquire due to its higher debt.

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