Enterprise Value vs. Equity Value: An Overview
Enterprise valueand equity value are two common ways that a business may be valued in a merger or acquisition. Both may be used in the valuation or sale of a business, but each offers a slightly different view. While enterprise value gives an accurate calculation of the overall current value of a business, similar to a balance sheet, equity value offers a snapshot of both current and potential future value.
In most cases, a stock market investor, or someone who is interested in buying a controlling interest in a company, will rely on an enterprise value for a fast and easy way to estimate the value. Equity value, on the other hand, is commonly used by owners and current shareholders to help shape future decisions.
Key Takeaways
- Enterprise value and equity value may both be used in the valuation or sale of a business, but each offers a slightly different view.
- Businesses calculate enterprise value by adding up themarket capitalization, or market cap, plus all of the debts in the company.
- The calculation for equity value adds enterprise value to redundant assets and then subtracts the debt net of cash available.
Enterprise Value
Enterprise valueconstitutes more than just outstanding equity. It theoretically reveals how much a business is worth, which is useful in comparing firms with different capital structures since the capital structure doesn't affect the value of a firm.
In the purchase of a company, an acquirer would have to assume the acquired company’s debt, along with the company’s cash. Acquiring the debt increases the cost to buy the company, but acquiring the cash reduces the cost of acquiring the company.
Businesses calculate enterprise value by adding up themarket capitalization, or market cap, plus all of the debts in the company. Debts may include interest due to shareholders, preferred shares, and other such things that the company owes. Subtract any cash or cash equivalents that the business currently holds, and you get the enterprise value. Think of enterprise value as a business' balance sheet, accounting for all of its current stocks, debt, and cash.
Equity Value
Equity value constitutes the value of the company's shares and loans that the shareholders have made available to the business. The calculation for equity value adds enterprise value to redundant assets (non-operating assets) and then subtracts the debt net of cash available. Total equity value can then be further broken down into the value of shareholders' loans and (both common and preferred) shares outstanding.
Equity value and market capitalization are often considered similar and even used interchangeably, but there is a key difference: market capitalization only considers the value of the company's common shares.
Preferred shares and shareholders' loans are considered debt. By contrast, equity value includes these instruments in its calculation. Equity value uses the same calculation as enterprise value but adds in the value ofstock options, convertible securities, and other potential assets or liabilities for the company. Because it considers factors that may not currently impact the company, but can at any time, equity value offers an indication of potential future value and growth potential. The equity value may fluctuate on any given day due to the normal rise and fall of the stock market.
FAQs
Both may be used in the valuation or sale of a business, but each offers a slightly different view. While enterprise value gives an accurate calculation of the overall current value of a business, similar to a balance sheet, equity value offers a snapshot of both current and potential future value.
What is difference between enterprise value and equity value? ›
Simply put, the enterprise value is the entire value of the business, without giving consideration to its capital structure, and equity value is the total value of a business that is attributable to the shareholders.
What is the difference between enterprise value and equity multiples? ›
Enterprise value multiples are better than equity value multiples because the former allow for direct comparison of different firms, regardless of capital structure. Recall, that the value of a firm is theoretically independent of capital structure. Equity value multiples, on the other hand, are influenced by leverage.
What is the difference between enterprise value and total value? ›
Enterprise value (EV) measures a company's total value, often used as a more comprehensive alternative to equity market capitalization. Enterprise value includes in its calculation not only the market capitalization of a company but also short-term and long-term debt and any cash on the company's balance sheet.
What is enterprise value vs equity value goodwill? ›
Enterprise Value seeks to value the trading business, including intangible assets such as goodwill, whereas Equity Value seeks to value the corporate structure from which the business operates, being the Enterprise Value plus Surplus Assets/Liabilities.
Which is bigger enterprise value or equity value? ›
The Equity Value is calculated by using the following formula: 'Equity Value = Enterprise Value + cash – debt +/- working capital adjustment'. The Equity Value can be higher or lower than the Enterprise Value, as this will be determined by whether the right hand side of the formula is positive or negative.
What do you mean by equity value? ›
Equity value is the value of a company available to owners or shareholders. It is the enterprise value plus all cash and cash equivalents, short and long-term investments, and less all short-term debt, long-term debt and minority interests.
Why is enterprise value lower than equity value? ›
Yes - EV can be less than equity value if net debt is negative. Net debt is calculated as total debt minus cash. If your cash balance is larger than the debt of the business, preferred shares and minority interest of the company combined then you will have an EV smaller than your equity value.
How is enterprise value calculated? ›
Enterprise value, often shortened to EV, is a form of business valuation used in mergers and acquisitions (M&A). Calculating EV involves adding together a company's market capitalization (how much its publicly traded shares are worth) and total debt minus any highly-liquid assets, like cash or savings.
Should I use enterprise value or equity value? ›
Both may be used in the valuation or sale of a business, but each offers a slightly different view. While enterprise value gives an accurate calculation of the overall current value of a business, similar to a balance sheet, equity value offers a snapshot of both current and potential future value.
As its name implies, enterprise value (EV) is the total value of a company, defined in terms of its financing. It includes both the current share price (market capitalization) and the cost to pay off debt (net debt, or debt minus cash).
Why is cash deducted from enterprise value? ›
Cash and Cash Equivalents
We subtract this amount from EV because it will reduce the acquiring costs of the target company. It is assumed that the acquirer will use the cash immediately to pay off a portion of the theoretical takeover price. Specifically, it would be immediately used to pay a dividend or buy back debt.
Why is enterprise value important? ›
Measuring Enterprise Value can help with decision-making for your company. For instance, Enterprise Value can help businesses allocate their capital. For example, a company might decide to invest in new projects, pay down debt, or repurchase shares of stock based on current Enterprise Value.
Can you have a negative equity value? ›
Negative equity occurs when the value of real estate property falls below the outstanding balance on the mortgage used to purchase that property. Negative equity is calculated simply by taking the current market value of the property and subtracting the amount remaining on the mortgage.
Do companies pay equity value or enterprise value? ›
Enterprise Value is the total value paid by the buyer for the future profits of the target in an acquisition. It is the value of business inclusive of all its stakeholders including all forms of debt and equity.
What does it mean if enterprise value is less than equity value? ›
Yes - EV can be less than equity value if net debt is negative. Net debt is calculated as total debt minus cash. If your cash balance is larger than the debt of the business, preferred shares and minority interest of the company combined then you will have an EV smaller than your equity value.
