What enterprise value means

Market cap is what all the shares are worth. Enterprise value (EV) is what the whole business is worth to someone buying it outright — because a buyer doesn’t just get the shares. They inherit the debt, which they’ll have to repay, and they get the cash in the bank, which they can pocket. So:

Enterprise value  =  Market cap  +  Debt  −  Cash and equivalents

Think of buying a house with a mortgage. The price you agree with the seller is the “market cap” of their equity. But you’re also taking over the loan, so the true cost of the house is price plus outstanding mortgage. If the seller leaves ₹2 lakh in a drawer as part of the deal, subtract that. EV is the price of the house; market cap is the price of the seller’s stake in it.

The EV/EBITDA post used this without dwelling on it. It deserves its own entry because the adjustment can be large, can go either direction, and is the thing that makes EV-based multiples comparable across companies with different amounts of debt.

The formula, and why each term is there

Term Why it’s included
+ Market cap The equity — what shareholders would be paid
+ Debt (borrowings, short and long term) The buyer assumes it; a lender has a claim on the business ahead of shareholders
− Cash and liquid investments The buyer receives it; it isn’t part of the operating business

Stricter versions also add preference shares and minority interests and subtract non-operating investments. For most listed Indian companies the three-term version gets you almost all the way.

Because EV represents the claims of both lenders and shareholders, it should be compared with profit measures that belong to both — EBIT (earnings before interest and tax), EBITDA (the same, before depreciation and amortisation too), revenue — and never with PAT (profit after tax), which belongs to shareholders alone. That is the logic behind pairing EV with EBITDA and market cap with earnings.

Worked example: Desi Bites Foods Ltd, at listing

From the case study’s listing block. The IPO raised ₹1,600 lakh of fresh cash that sits on the balance sheet, which is what makes this example instructive:

₹ lakh  
Market cap (12.5 lakh shares × ₹640) 8,000
+ Term loan 400
− Cash (post-IPO) 1,880
= Enterprise value 6,520
FY25 EBITDA 441
Market cap / EBITDA 18.1x
EV / EBITDA 14.8x

The market values Desi Bites’ shares at ₹8,000 lakh, but nearly a quarter of that is cash the company is holding, not a snacks business. Strip it out and a buyer is paying ₹6,520 lakh for the operations — 14.8x EBITDA rather than the 18.1x the market cap alone suggests. Same company, and a multiple that’s a fifth lower once you count the cash.

Worked example: Britannia Industries

Price ₹5,851 (NSE close, 30 June 2025; source: Yahoo Finance) against the FY25 balance sheet from the audited results (year ended 31 March 2025). For illustration only. Only current (liquid) investments are subtracted; Britannia’s non-current investments are deliberately left in, as longer-term holdings rather than spare cash. The stricter version above would subtract them too, pulling EV a little lower.

₹ crore  
Market cap 1,40,950.59
+ Total borrowings 1,224.77
− Cash and bank balances 312.48
− Current (liquid) investments 1,111.64
= Enterprise value 1,40,751.24
EV − market cap −199.35
EV / EBITDA 44.2x

Britannia’s EV is smaller than its market cap, by ₹199.35 crore. That is the net debt/EBITDA post’s finding restated: the company holds slightly more cash and liquid investments than it owes, so a buyer would be paid a little to take the balance sheet. At Britannia’s scale the adjustment is tiny — 0.1% of market cap — and EV/EBITDA rounds to the same 44.2x either way. For Desi Bites it was a fifth. The adjustment’s size is company-specific; the principle isn’t.

Same market cap, three different prices

Three made-up companies, each with a market cap of 1,000:

Market cap Debt Cash EV
A (net cash) 1,000 0 300 700
B (no debt, no cash) 1,000 0 0 1,000
C (levered) 1,000 600 100 1,500

If all three earned the same EBITDA, a market-cap multiple would call them equally priced. An EV multiple says C costs more than twice what A does. C’s shareholders own a thin slice of a heavily borrowed business; A’s own a business plus a pile of cash. Those aren’t the same purchase, and only EV says so.

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

Your friend sells you her bicycle shop for ₹1,000. But the shop owes the bank ₹600, and you’ll have to pay that. And there’s ₹100 in the till, which is now yours. What did the shop really cost you? ₹1,000 + ₹600 − ₹100 = ₹1,500.

That’s enterprise value. The ₹1,000 is just what your friend’s share of the shop was worth.

Common mistakes

  • Comparing EV with PAT, or market cap with EBITDA. Match the numerator’s claim-holders to the denominator’s: EV ↔ EBIT/EBITDA/revenue; market cap ↔ PAT/book value.
  • Forgetting to subtract cash. For a cash-rich company this overstates the price of the business — by a fifth in Desi Bites’ case.
  • Treating all cash as excess. Some cash is needed to run the business (working capital). Analysts sometimes subtract only “surplus” cash; the simple version subtracts all of it. Know which you’re using.
  • Ignoring debt-like items. Lease liabilities, preference capital, and pension deficits behave like debt. For leasing-heavy businesses (retail, airlines) leaving them out understates EV materially. If you do add lease liabilities, pair EV with EBITDA as reported under Ind AS 116 (which already excludes the lease rent), so both sides match.

Takeaway: enterprise value is market cap plus debt minus cash — the cost of the whole business rather than of its shares. That’s why EV, not market cap, is the right numerator whenever the denominator belongs to lenders as well as shareholders.