Enterprise Value vs Equity Value

Understanding the Bridge Between Total Value and Shareholder Value

Enterprise Value vs Equity Value: What's the Difference?

Enterprise Value (EV) represents the total value of the entire business, while Equity Value represents only what belongs to common shareholders.

Understanding this distinction is critical for DCF valuation. Your DCF model calculates Enterprise Value first (using WACC and unlevered cash flows), then converts it to Equity Value per share by subtracting net debt and other claims on the business.

Key Insight: Think of buying a house with a mortgage. The house's total value (EV) is $500K, but your equity (what you own) might only be $300K after subtracting the $200K mortgage. The same logic applies to companies.

Core Definitions

Enterprise Value (EV)

Definition: The total value of the operating business, available to ALL capital providers (debt + equity)

Represents: What it would cost to buy the entire company

Used for:

  • DCF valuation (unlevered FCF)
  • M&A transaction pricing
  • EV/EBITDA multiples
  • Comparing companies with different capital structures

Equity Value

Definition: The value belonging to common shareholders only

Represents: Market capitalization (what the stock is worth in aggregate)

Used for:

  • Calculating intrinsic value per share
  • P/E ratio calculations
  • Price/Book multiples
  • Comparing to market cap

The Enterprise Value Bridge

The bridge formula connects Enterprise Value to Equity Value by adjusting for non-operating assets and other capital claims:

Equity Value = Enterprise Value - Net Debt - Preferred Stock - Minority Interest + Investments

Simplified Version (most common):

Equity Value = Enterprise Value - Net Debt

Where Net Debt = Total Debt - Cash and Cash Equivalents

The Logic Behind Each Adjustment:

Subtract Total Debt

Debt holders have a claim on the company that must be paid before shareholders get anything. When you buy all shares, you're also assuming responsibility for the debt.

Includes: Long-term debt, short-term debt, current portion of LT debt, capital leases, bank lines of credit
Add Back Cash & Equivalents

Cash is a non-operating asset that belongs to shareholders. If you buy the company, you get the cash too, effectively reducing your net purchase price.

Includes: Cash, short-term investments, marketable securities (be conservative - only truly liquid assets)
Subtract Minority Interest

Minority interest represents partial ownership of subsidiaries that you don't fully control. These stakes belong to other investors, not your shareholders.

Example: If your company owns 80% of a subsidiary, the other 20% is minority interest
Subtract Preferred Stock

Preferred shareholders have priority over common shareholders. Their claim must be satisfied before common equity has value.

Note: Use redemption value if different from book value
Add Investments in Associates

Minority stakes in other companies (20-50% ownership) are non-operating assets that add value to equity.

Valuation: Use market value if publicly traded, or book value/recent funding valuation if private

Complete EV to Equity Value Bridge Example

Company ABC - DCF Analysis Results:

Step 1: Calculate Enterprise Value (from DCF)

  • PV of Projected FCF (Years 1-5) = $2,000M
  • PV of Terminal Value = $8,000M

Enterprise Value = $10,000M

Step 2: Gather Balance Sheet Data

  • Total Debt = $2,500M
  • Cash and Cash Equivalents = $500M
  • Minority Interest = $200M
  • Preferred Stock = $0M
  • Investments in Associates = $100M (market value)
  • Shares Outstanding = 100M shares

Step 3: Calculate Equity Value

Enterprise Value = $10,000M

- Total Debt = ($2,500M)

+ Cash = $500M

- Minority Interest = ($200M)

- Preferred Stock = $0M

+ Investments = $100M

Equity Value = $7,900M

Intrinsic Value Per Share:

$7,900M ÷ 100M shares = $79.00 per share

Interpretation: If the stock currently trades at $65, it's undervalued by about 22% ($79 intrinsic value vs $65 market price).

Understanding Net Debt

Net Debt is the most important adjustment in the EV bridge. Here's how to calculate it correctly:

Net Debt = Total Debt - Cash and Cash Equivalents

What to Include in Total Debt:

Include
  • Long-term debt
  • Short-term debt
  • Current portion of long-term debt
  • Capital lease obligations
  • Notes payable
  • Bank lines of credit (drawn)
  • Commercial paper
Exclude
  • Accounts payable (operating liability)
  • Accrued expenses (operating liability)
  • Deferred revenue (operating liability)
  • Pension liabilities (sometimes - debatable)
  • Contingent liabilities
  • Undrawn credit facilities

What to Include in Cash:

Be Conservative! Only include truly liquid, unrestricted cash and equivalents:

  • Include: Cash, checking accounts, money market funds, T-bills, marketable securities
  • Exclude: Restricted cash, cash held overseas with repatriation taxes, illiquid investments

Net Debt Scenarios:

Positive Net Debt

Debt > Cash

Example:
Debt: $1,000M
Cash: $300M
Net Debt: $700M

Reduces equity value (most common)

Zero Net Debt

Debt = Cash

Example:
Debt: $500M
Cash: $500M
Net Debt: $0M

No adjustment to EV

Net Cash Position

Cash > Debt

Example:
Debt: $200M
Cash: $1,000M
Net Debt: -$800M

Increases equity value (tech companies)

Working Backwards: Market Cap to Enterprise Value

Sometimes you need to calculate Enterprise Value from Market Cap (for example, when calculating trading multiples):

Enterprise Value = Market Cap + Net Debt + Minority Interest + Preferred Stock - Investments

Example: Calculate EV/EBITDA for a Public Company

Public Company XYZ:

  • Share Price = $50
  • Shares Outstanding = 200M
  • Total Debt = $3,000M
  • Cash = $1,000M
  • Minority Interest = $500M
  • LTM EBITDA = $1,500M

Step 1: Market Cap = $50 × 200M = $10,000M

Step 2: Net Debt = $3,000M - $1,000M = $2,000M

Step 3: EV = $10,000M + $2,000M + $500M = $12,500M

Step 4: EV/EBITDA = $12,500M / $1,500M = 8.3x

Special Situations and Adjustments

Pension Liabilities

Underfunded pension obligations are debt-like claims on the company:

Treatment: Subtract the underfunded amount (Pension Liability - Pension Assets) from equity value. This is most relevant for mature industrial companies.
Stock Options and Warrants

In-the-money options dilute existing shareholders:

Treatment: Use the treasury stock method. Calculate diluted shares outstanding, or subtract the in-the-money value from equity value. Most financial databases report diluted shares already.
Operating Leases (Pre-2019 Accounting)

Operating leases are now capitalized under IFRS 16/ASC 842, but for older data:

Treatment: Add PV of lease obligations to debt. Increase EBITDA by lease expense to normalize. This puts all companies on comparable footing.
Noncontrolling Interests (Minority Interest)

When the company owns >50% of subsidiaries but not 100%:

Treatment: Subtract at book value (balance sheet amount) unless you have better information. The DCF includes 100% of subsidiary cash flows, so we must remove the portion that doesn't belong to our shareholders.

Common EV Bridge Mistakes

Forgetting to Subtract Net Debt

This is the #1 error. DCF gives you EV, not equity value. Always subtract net debt to get intrinsic value per share. Failing to do this can overvalue equity by 30-50%.

Including Operating Liabilities in Debt

Don't include accounts payable, accrued expenses, or deferred revenue in debt. These are part of net working capital, already reflected in FCF.

Using Book Value of Debt

For most companies, book value ≈ market value of debt, so book value is acceptable. But for distressed companies with trading debt, use market value.

Mixing Up the Direction

Remember: Equity Value = EV - Net Debt (for DCF). Enterprise Value = Market Cap + Net Debt (for trading multiples). They're inverses of each other.

Ignoring Minority Interest

If the company has significant minority interest on the balance sheet, you must subtract it. Your DCF includes 100% of subsidiary cash flows, but you don't own 100%.

Forgetting About Preferred Stock

Preferred stock sits between debt and common equity. It must be subtracted from EV to get common equity value. Use redemption value if available.

Quick Reference: EV Bridge Checklist

From EV to Equity Value (DCF):

✓ Start with Enterprise Value (from DCF)

✓ Subtract Total Debt

✓ Add Cash & Equivalents

✓ Subtract Minority Interest

✓ Subtract Preferred Stock

✓ Add Investments (if material)

✓ Divide by diluted shares outstanding

= Intrinsic Value Per Share

From Market Cap to EV (Multiples):

✓ Start with Market Capitalization

✓ Add Total Debt

✓ Subtract Cash & Equivalents

✓ Add Minority Interest

✓ Add Preferred Stock

✓ Subtract Investments (if material)

✓ Divide by EBITDA (or Revenue)

= EV/EBITDA Multiple

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