Equity & Enterprise Value

Equity Value vs. Enterprise Value – What's the Difference?

Equity Value refers to the value of the ENTIRE company that is attributable to EQUITY investors only. It is often expressed on a per share basis for public companies, and is calculated by multiplying a company's share price by its total number of shares outstanding:

Equity Value = Share Price x Number of Shares Outstanding

Enterprise Value, on the other hand, refers to the value of a company's CORE BUSINESS OPERATIONS that is available to ALL investor groups. It is possible to derive the Enterprise Value of a company from its Equity Value (and vice versa). To derive Enterprise Value from Equity Value, simply subtract the value of Non-Operating Assets (since Enterprise Value only includes the value of the company's core business operations) and add Liability & Equity items that correspond to other investor groups (since Enterprise Value is available to all shareholders). The primary Non-Operating Asset to subtract is Cash (& Cash Equivalents) while the main Liability & Equity item to add is Debt. Thus we have the following formulae:

Enterprise Value = Equity Value - Cash + Debt

Equity Value = Enterprise Value - Debt + Cash

 

You will often have to bridge between the two values. For example, Discounted Cash Flow Analyses yield the implied Enterprise Value of the company you are valuing and you will have to derive the company's Equity Value (using the above formula) to determine the implied Price per Share. 

The difference between Debt and Cash is often referred to as "Net Debt" (Net Debt = Debt - Cash). The relationship between Equity Value and Enterprise Value can therefore be summarized as follows:

Enterprise Value = Equity Value + Net Debt

Equity Value = Enterprise Value - Net Debt

Enterprise Value

Net Debt

Equity Value

Using Equity Value & Enterprise Value – Valuation Multiples

On their own, Equity Value and Enterprise Value are useful but incomplete. The problem is that if two companies have different sizes (e.g., one has $200 million in revenue while the other has $100 million), then you cannot compare their two values directly. It would be like comparing the price of a house with 2,000 square feet to the price of a house with 1,000 square feet. In order to make a proper comparison, you would have to normalize the numbers and compare them on a per-square-foot basis. The same logic applies to companies. With businesses, you normalize Equity and Enterprise Value by dividing them by specific metrics, including Revenue, EBIT, and EBITDA. Thus, you would be comparing companies on an Equity/Enterprise Value per metric basis. Here, Enterprise or Equity Value is just like 'price' while Revenue (or whichever metric you choose) is just like the 'square foot' value. 

So which metrics pair with Equity Value and which ones pair with Enterprise Value?  The simple answer is: If the metric corresponds to only equity investors, then it pairs with Equity Value. If the metric corresponds to all investor groups (including debt holders, preferred stock holders, etc.), then the metric pairs with Enterprise Value. Metrics that factor in Net Interest Expense (i.e., line items that appear after the Interest Expense/Income line on the Income Statement) are applicable only to Equity investors, since debt holders have already been paid (via Interest). These metrics, the primary one being Net Income, therefore go with Equity Value. By the same token, metrics that do not include Net Interest Expense (i.e., line items that appear before the Interest Expense/Income line on the Income Statement) are applicable to all investors, since debt holders have not been paid yet. These metrics, the main ones being Revenue, EBIT, and EBITDA, therefore go with Enterprise Value.