VR Logo

Added baggage

Enterprise value of companies is at its highest levels currently

Of the many ways of valuation of a company, enterprise value is one of them. It means how much a buyer will have to pay to own a company. The logic behind its derivation is that a buyer will not only have to pay for the market capitalisation of a company but will also need to pay back its long term debt. At the same time, the cash lying with the company will also go in the new buyer's kitty.

We calculated the enterprise value of the Nifty Index as a whole and found that it is at the highest level currently. The high level of enterprise value is mainly due to the significant rise in debt levels of companies, outpacing the growth in cash and equivalents. Also, market cap discount to EV is high at more than 10 per cent, although less than FY12 and FY 09.