Enterprise Value vs Equity Value

Enterprise Value and Equity Value are two fundamental concepts in corporate finance that help in calculating a company’s worth, particularly capital-intensive industries. Both are methods of company valuation and form the foundation of various valuation multiples, but each functions differently. Based on the nature of the industry and business strategies, one method is preferred over the other—no regulatory obligations surrounding their usage. The final decision lies with the valuation firms facilitating the merger.

Key Takeaways

• Enterprise value provides the value for the entire business, while equity value is just the portion attributable to common shareholders.
• Changes in structure of capital intensive (issuing debt or equity) do not affect enterprise value, while equity value fluctuates with the stock price.
• Equity value represents the value attributable only to the equity holders or shareholders of the company.
• Equity value is calculated as the enterprise value minus net debt (debt minus cash) and minus the value of preferred equity. 

Overview of Enterprise Value Vs Equity Value

Every company is made of various classes of assets and liabilities. When a business is considered for a potential takeover, it is natural for the acquirer to employ different financial models to arrive at a realistic acquisition cost. This includes accounting for the book value and the market value of all tangible and intangible aspects of the new business.

When comparing companies, understanding the distinction between EV and Equity Value is crucial. These metrics provide different insights into a company’s financial health and market position.

Enterprise Value (EV)

Enterprise Value (EV) is a comprehensive company valuation method involving all aspects of company ownership. It is a detailed, theoretical calculation of a company’s worth in the market. Needless to say, investors and big businesses looking to invest or take over a new business rely more on EV to understand the extent of profits and liabilities arising out of an acquisition. Another important aspect of enterprise value vs market cap is that market cap fluctuates based on trading trends while the former does not.

EV is often used in ratios like EV/EBITDA, which is particularly useful for capital intensive companies as it normalizes different capital structures. A lower EV/EBITDA ratio indicates that a company is undervalued relative to its peers, while a higher ratio could suggest overvaluation. This metric is especially useful in capital intensive industries where P/E ratios may not provide an accurate picture. For Instance a company with an EV/EBITDA of 8x might be considered as undervalued compared to similar ones averaging 10x.

Equity Value

As the name suggests, equity value is the total share value of a company. It is often used interchangeably with the market cap but is not the same. Market cap only accounts for common shares, while equity value accounts for common shares, preferred shares, and convertible notes. These are generally considered as debt extended by shareholders. They do not immediately reflect as issued stock but convert on a later date.

Enterprise Value vs Equity Value, when compared, reveal valuable information to two different groups of stakeholders. The former provides a holistic view of a company. It helps investors make profitable decisions, while the latter concentrates on net share value and helps shareholders and company management understand the company’s present health and make necessary changes to enhance profits.

Key Differences Between Enterprise Value and Equity Value

Since equity value is dependent on stock prices, it is an integral part of enterprise value calculations. But as a standalone company valuation metric, the differences between these two are quite obvious. Here are some of the aspects where enterprise value (EV) and equity value differ:

• Industry focus – EV is a diverse and holistic company valuation metric. It works well for all industries except banking, insurance, and those operating with high debt levels as a business strategy (e.g. heavy machinery). Equity value, though dependent on stock market fluctuations, applies to all types of industries.
• Beneficiary – EV provides the net value of a company for investor purposes. Investors must know the accurate picture while taking over a company or investing in it for a considerable stake (not just the market impression of the company based on the share price). On the other hand, equity value provides the net value of equity a company directed towards shareholders and company management. It is a valuation metric that these stakeholders use to understand the financial health of a company.
• Fluctuations – One of the fundamental differentiators between enterprise value vs equity value is that the former is not affected by changes in stock price. Though the market cap is included in the calculation, the total EV is immune to market fluctuations. This is not the case with equity value. It is solely dependent on stock prices and will fluctuate with the rise and fall of stock markets. Another aspect is that EV accounts for the changes in total debt, interest generated from income, and expenses. Equity value does not account for these and focuses only on the changes in equity-related values.
• Pairing – EV is paired with all current information (i.e.net operating assets). This makes sense as an investor needs the present status quo to decide which company to prefer. But equity value is paired with all assets current as well as in the future (i.e. net assets). Equity in a company, in many ways, is a function on time.
• Cash flow accountability – EV accounts for those cash flow mechanisms that are concerned with investors alone. This is why unlevered free cash flow is discounted by WACC (weighted average cost of capital). Meanwhile, equity value accounts for cash flow mechanisms that indicate shareholder profits. Thus levered cash flow is discounted by the cost of equity. This is an important aspect while comparing these two values.

Aspect	Enterprise Value	Equity Value
Scope	Enterprise value represents the total value of a company's business, including both equity and debt.	Equity value represents only the portion of value attributable to the company's equity holders or shareholders.
Calculation	Enterprise value is calculated as market capitalization + debt + minority interest + preferred shares - total cash.	Equity value is calculated as enterprise value - net debt (debt minus cash) - preferred equity.
Capital Structure Impact	Enterprise value is theoretically unaffected by changes in a capital intensive company's structure (issuing debt or equity).	Equity value fluctuates with the stock price and is impacted by financing events like issuing debt or equity.
Stakeholder Focus	Enterprise value provides value for all stakeholders - equity holders, debt holders, etc.	Equity value focuses specifically on the value accruing to common shareholders.
Cash/Debt Treatment	Enterprise value accounts for a company's net debt position by adding debt and subtracting cash.	Equity value is calculated after netting out the impact of debt and cash on the enterprise value.
Valuation Multiples	Enterprise value pairs with operational metrics like EBITDA and free cash flow for valuation multiples.	Equity value pairs with metrics focused on shareholder returns like P/E ratio.
Relevance	Enterprise value is more relevant for potential acquirers evaluating the entire business.	Equity value is more relevant when assessing current shareholders' stake value.

Calculation of Enterprise Value vs Equity Value

When compared, these two values have many differences. However, both have some variations to the formula. One is simple, and the other a bit more elaborate. Depending on the company size and stage of growth, each of these elaborate formulas plays a role in accounting for all aspects of company ownership. Let’s take a look:

Enterprise Value Formula

The simplest version of the enterprise value formula is:

OR

The more elaborate version is:

Where:

• Total value of common shares or Market cap = Total number of common shares * price per share
• Preferred shares – Regular dividend-generating shares, considered as debt
• Total value of debt – Government and private loans, both long-term and short-term
• Minority interest – Value of less than 50% stakes in other companies
• Cash & Cash equivalents – all liquid assets of the company

Example of calculating enterprise value

Let’s consider ANC Inc., To calculate the EV of this company, we must calculate its market cap, as per the formula. Let’s say the company has issued 2,000,000 shares, each valued at $10.

This is the total market value of common shares of ANC. Inc. Further, let’s say:

• Market value of preferred shares = $1,000,000
• Market value of total debt = $1,000,000
• Market value of minority interests = $1,000,000
• Total value of cash = $2,000,000

Equity Value formula

The simplest version of the formula is:

OR

OR

The most elaborate version is:

Example of calculating Equity Value

Following the previous example of ANC Inc, the calculations will be:

This is a simple way to understand how company valuation calculations work with enterprise value vs equity value. At the onset, equity value might come across as the same as market cap. This is what the above calculations reveal as well. But it will differ in the case of companies with large volumes of non-operating assets beyond the market cap value.

With varying balance sheets for companies across different industries, professional valuation experts must be engaged to ensure that all components of a company’s ownership structure are accounted for. Otherwise, stakeholders will be misled into making hasty, ill-informed investment decisions.

Points to Consider in Enterprise Value and Equity Value Calculation

These two values are quite simple to understand. However, there may be variations at times. An analyst must clearly understand how these values vary and read them right. Here are two basic factors:

Reading values

The importance of any valuation metric lies in its ease of comprehension. On this note, it is useful to consider that EV can be negative and still indicate a profitable takeover. For example:

• Market cap of XYZ.Inc = $1,000,000
• Debt = $50,000
• Cash = $2,000,000

Though the value is negative, this company’s financial health is positive, and the acquiring company will benefit from the low debt liability and surplus cash value.

However, this problem does not arise with equity value. Since it is a direct measure of company equity that can never be negative, they are always positive.

Effect of financing events

Financing events typically affect the total number of shares. Every time a new round of funds is injected, investors demand equity in exchange. Most often, alterations to the equity structure are demanded pre-money, which includes changes such as expanding the options pool as well. Companies in capital intensive industries are often marked by high levels of depriciation.

Effect on short term debt

Short term debt directly impacts a company’s enterprise value calculation. i.e.:

Where:

• Net Debt= Short Term Debt +Long Term debt-cash & cash Equivalents
• A higher short-term debt level will increase the company’s net debt position, increasing the overall EV. Excessive short term debt indicates the liquidity issues.

Between these two values, since EV concentrates only on the net operating assets, in theory, financing rounds should not affect its overall value. Major changes in enterprise value are observed only when there are alterations in the net debt or cash value.

Relevance and Uses of Enterprise Value and Equity Value

• EV is directly associated with company valuations during mergers and acquisitions, while internal stakeholders use equity value to analyze business trends and change or edit courses accordingly.
• Investment bankers use EVs to advise companies for a takeover or a merger. In contrast, research analysts use equity value to advise individual stakeholders to buy or sell company stock for profits.
• The enterprise value formula comes in handy in company valuation when two companies have a similar market cap. EV helps make that distinction of a profitable takeover by pointing out the effects of company debt and cash reserves.
• While comparing enterprise value vs equity value, EV gives a more realistic picture of a company value because it involves the debt component. An investor acquiring a company will be responsible for taking overall liabilities of debt. This is crucial information before closing an acquisition deal.
• Similarly, EV also points out an acquiring company’s cash reserves. This is helpful for the investors because, most often, they use this surplus cash and cash equivalents to pay off carried-over debts: the higher cash reserves, the better profits for the acquiring company. This is helpful for the investors because, most often, they use this surplus cash and cash equivalents to pay off carried-over debts: the higher cash reserves, the better profits for the acquiring company.
• The enterprise value formula reveals the EV. But EV’s utility is better understood in the way it functions with valuation multiples. EV is fundamental to valuation metrics such as EBITDA, EBIT, FCFF, and many more.

Are you looking to find your company’s true value?

As we see, company valuation is a tricky process. What works for one business may not work for another. Many underlying factors need to be considered before choosing the most suitable company valuation method. It is best done with the help of professionals.

Eqvista is the pioneer in cap table management and company valuations. If you have any questions regarding company valuation, contact us today.