What is enterprise value (EV)?

Enterprise value (EV) is an important metric that provides a comprehensive view of a company's total value, assessing not just the equity but also the liabilities of the firm. This metric is calculated by taking the market capitalization of a company, which reflects the equity value, and then adding the total debt to this figure. From this total, cash and cash equivalents are subtracted because they can be used to pay down debt, thus not reflecting the company's net obligations to stakeholders accurately.

By including debt and subtracting cash, EV gives a clearer picture of what it would cost to acquire the entire company, making it a key figure in both M&A analysis and financial modeling. This measure allows investors to compare companies regardless of their capital structure, enabling a more consistent assessment of financial health and value in acquisitions and investments.

The other choices provide limited or incorrect views. For instance, market capitalization only considers equity and ignores debt, while total cash reserves and the financial value of physical assets do not account for the entirety of a company's liabilities and overall financial situation.