Enterprise Value vs Equity Value

Differences between enterprise (firm value) value and equity value.

Overview of enterprise value vs equity value

In this guide, we outline difference between the enterprise value of a business, and the equity value of a business.  Simply put, the enterprise value is the entire value of the business, without giving consideration to its capital structure.  Learn all about Enterprise Value vs Equity Value.

To learn more, watch our video explanation below:

 

Enterprise value

The enterprise value (which can also be called firm value, or asset value) is the total value of the assets of the business.  When you value a business using unlevered free cash flow in a DCF model you are calculating the firm’s enterprise value.  If you already know the firm’s equity value as well their total debt and cash balances, you can use them to calculate enterprise value.

 

Enterprise value formula

If equity, debt and cash are known, you can calculate enterprise value as follows:

EV = (share price x # of shares) + total debt – cash

Where EV equals Enterprise Value

 

Valuation Techniques

Learn the most important valuation techniques in CFI's Business Valuation course!Step by step instruction on how the professionals on Wall Street value a company. 

 

Learn valuation the easy way with templates and step by step instruction!

 

Equity value

The equity value (or net asset value) is the value that remains for the shareholders after any debts have been paid off.  When you value a company using levered free cash flow in a DCF model you are determining the company’s equity value. If you know the enterprise value and have the total amount of debt and cash at the firm you can calculate the equity value as shown below.

 

Equity value formula

If enterprise value, debt and cash are known, you can calculate equity value as follows:

Equity value = Enterprise Value – total debt + cash

Or

Equity value = # of shares x share price

 

Use in valuation

Enterprise values is more commonly used in valuation techniques as it makes companies more comparable by removing their capital structure from the equation.

In investment banking, for example, it’s much more common to value the entire business (enterprise value) when advising a client on an M&A process.

In equity research, by contrast, it’s more common to focus on the equity value, since research analysts are advising investors on buying individual shares, not the entire business.

 

Example comparison

In the illustration below you will see an example of enterprise value vs equity value.  We take two companies that have the same asset value, and show what happens to their equity value as we change their capital structures.

Enterprise Value vs Equity Value

 

Financial modeling applications

When building financial models it’s important to the differences between levered and unlevered free cash flow, and whether you are deriving the equity value of a firm or the enterprise value of a firm.

Learn more:

 

House analogy

One of the easiest ways to explain enterprise value versus equity value is with the analogy of a house.  The value of the property plus the house is the enterprise value.  The value after deducing your mortgage is the equity value.

Imaging the following example:

  • Value of house (building): $500,000
  • Value of property (land): $1,000,000
  • Box of cash in the basement: $50,000
  • Mortgage: $750,000

What is the enterprise value?

$1,500,0000. (Value of house plus value of property equals the enterprise value)

What is the equity value?

$800,000. (Value of the house plus value of the properly plus value of the cash less the mortgage)

 

More about enterprise value vs equity value

We hope this article has been a helpful guide on enterprise value versus equity value. To learn more, please check out our free introduction to corporate finance course for a video based explanation of enterprise value versus equity value.

Additional resources that you may find helpful include: