Enterprise Value or so-called firm value is an important concept for investors, because EV is an indicator how the market attributes the firm as a whole.

Why? Because in EV calculation there are some factors not including in market capitalization calculation of one firm. This is how to measure EV:

Enterprise Value = Market Capitalization + Debt with interest expense -Cash and Cash Equivalent

Market Capitalization = Stock Market Price x outstanding shares

It seems difficult, but actually it is not, let's try to the next example:

For instance: ABC firm has 700M shares placed and fully deposit (the number obtained in the balance sheet on equity sector)and right now it is traded with the price of Rp 2,000 per share. As an additional information, the firm has cash and cash equivalent Rp 300B and loan debt and bond Rp 500B. Then, to measure the EV:

Market capitalization = 700M x Rp 2,000 = Rp 1,400B

EV= Rp 1,400B + Rp 500B - Rp 300B = Rp 1,600B (Rp 1.6T)

As an additional illustration, perhaps one firm has smaller market capitalization from the example above, for example Rp 700B, but it has bond with the higher interest, i.e. Rp 1.2T. According to EV, the firm value may be the same. It proves that the aspect of one firm's capital structure is also important to be considered in measuring the firm value.

Why do the debt and cash considered in measuring one firm? For instance, the firm sold to the new owner. The buyer has to pay as much as equity value (usually the price is higher than the market price) and has to repay the firm's debts too. And to attribute the debt, the buyer can decrease it with cash. Or in the other words, to measure EV, the debt and cash used to gain the natural value of the firm, not only the stock.

How to use EV in stock valuation? See this article EV/EBITDA.