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Finance question: Total Enterprise Value (TEV)?


TEV = Market Cap + Long Term Debt - Cash

What is this used for? I understand market cap being the stock price x # of shares out, but what does TEV tell you? Why add back Debt and subtract out cash?

It is a way to compare, or value, companies that have different capitalization (debt/equity) structures. So, if you're valuing two different companies at some multiple of earnings, cash flow, sales, etc., then you'll arrive at enterprise value. To figure out the equity value of each, you need to subtract out the debt.

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