Question

Describe the importance of the Enterprise Valuation measure? Do you think it is useful? Why or why not?

Answer 1

The enterprise value is an indicator of how the market attributes value of an Enterprise. It measures how much you need to look at when you buy an entire public company.

Importance of Enterprise Value:

• It indicates the worth of the company, which is the economic value of a company.
• It helps in comparing companies of different capital structures.
• Returns from different businesses can be compared to the ones interested in buying controlling stakes.
• For the stock market investors, it is used to neutralize the risks and accordingly compare the returns expected.

Knowing alone Enterprise Value alone is not all that useful. One has to know about a company by comparing Enterprise Value to a measure of the company's cash flow.

The value of Enterprise Value lies in its ability to compare companies with different capital structures. By using enterprise value instead of market capitalization to look at the value of a company, investors get a more accurate sense of whether or not a company is truly undervalued.