Enterprise Value vs Equity Value

Overview of Enterprise Value vs Equity Value

In this guide, we outline the difference between the enterprise value and the equity value of a business. The enterprise value is the entire value of the business without considering its capital structure, and equity value is the total value of a business that is attributable to the shareholders. Learn all about Enterprise Value vs Equity Value.

Enterprise value

The enterprise value (which can also be called firm value or asset value) is the total value of the business’s assets (excluding cash). 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 and its total debt and cash balances, you can use them to calculate enterprise value.

Enterprise value formula

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

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

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 below.

Equity value formula

If enterprise value, debt, and cash are all known, then 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 value 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, it’s more common to focus on the equity value since research analysts advise investors on buying individual shares, not the entire business.

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 deducting your mortgage is the equity value.

Imagine 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 property, plus value of the cash, less the value of the mortgage)

Here is an illustration of the house example with some different numbers. Each of the three houses below has a different financing structure, yet the value of the assets (the enterprise) remains the same.