Enterprise Value vs. Equity Value ComparisonDifferences You Need to Know Between the Two!
Enterprise value and equity value are two of the most common valuation multiples analysts use to calculate the value of a business, and though these two metrics are often confused for each other, they both offer a unique viewpoint.
While enterprise value offers an analysis of a business’s overall current value, similar to how a company’s balance sheet would, equity value offers a view of what the business is worth to its equity shareholders both now as well as its potential future value.
These valuation multiples also will often be of different value depending on the specific application they are being used for.
A corporate investor looking to make a decision regarding acquiring a company would likely use enterprise value due to the speed with which it can be calculated and the accurate picture it provides of a company’s current value.
However, for a company’s owners or shareholders, equity value will more often be used in making decisions due to the more forward-looking viewpoint it offers.
Enterprise Value
Enterprise value, also known as a firm value, is a measure of the total value of a company, not just the value available to investors.
As a result, all ownership interests are considered, including debt and equity.
This provides a full picture of the current value of a company to more than just its owners and equity shareholders.
The formula for enterprise value is:
Enterprise Value = (Share Price * Number of Outstanding Shares) + Total Debt – Cash & Cash Equivalents
This metric represents a picture of how much a company would cost to acquire, as in the case that a company was to be purchased, the acquiring entity would acquire all of the company’s debts as well as its cash and cash equivalents.
As a result, the debts act to increase the acquisition cost, and the cash and cash equivalents act to reduce it.
Due to the clear picture it offers of the costs of acquiring a company, this is a valuable metric for investors.
In order to calculate enterprise value, market capitalization, which is all shares outstanding times its share prices, is taken and then added to all of a company’s debts before subtracting all cash and cash equivalents.
These debts include all short-term and long-term obligations such as interest due to shareholders and will be reduced by any cash and cash equivalents that an acquirer could use to pay for the assumed debt.
It is preferable to use the market value of a company’s debt to provide a more accurate picture of its value, but this can be difficult to determine, so book value can be used instead.
Equity Value
Equity value is the value of a company that is available to its owners or shareholders.
This can be calculated by multiplying fully-diluted shares outstanding by the current share price.
Diluted shares mean that in addition to basic shares, all shares that could be claimed, such as stock options, convertible securities, and warrants, are included.
This can be calculated both directly by multiplying fully diluted shares by share price or indirectly by adding the value of non-operating assets to enterprise value and subtracting net debt. The formula for the direct means is:
Equity Value = Fully – Diluted Shares Outstanding * Share Price
And for the indirect means
Equity Value = Enterprise Value – Total Debt – Non-Controlling Interests – Preferred Stock + Cash & Cash Equivalents
As can be seen from the formulas above, equity value includes instruments such as preferred shares and loans from shareholders in its measurement.
Ordinarily, these instruments would be considered debt, but when calculating equity value, these factors are included.
Whereas enterprise value considers factors that currently impact the company, equity value includes factors that could impact the company as either assets or liabilities at any time, such as convertible securities and stock options.
Due to this, equity value offers a more complex and forward-looking method of valuation in comparison with enterprise value.
This is also far more prone to rapid fluctuations within even a single day as the stock market rises and falls.
Equity value is an important measurement for businesses as well as their shareholders.
For shareholders, this metric represents a rough estimation of what they can expect to earn should the business be sold or go bankrupt after all of its debt obligations have been met.
For a business, this metric is often used by banks to analyze a company’s financial health when it seeks a business loan.
This is because should the company be unable to repay the loan, equity value represents what the business would be worth as collateral.
Key Takeaways
- Both equity value and enterprise value are valuation multiples that offer a picture of a business’s value; however, they each offer a unique viewpoint.
- Enterprise value can be calculated by finding a company’s market capitalization, adding its total debt, and subtracting its cash and cash equivalents.
- Equity value can be found by multiplying the total number of shares outstanding by the share price.