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Enterprise Value vs. Equity Value: A Comprehensive Guide
Nov 1, 2023 11:53 AM - Parth Sanghvi
Image credit: Yiorgos Ntrahas
Enterprise value (EV) and Equity Value are two financial metrics that are used to measure the value of a company. EV is a more comprehensive measure of value, as it takes into account all of a company's capital, including debt, equity, and preferred stock. Equity value, on the other hand, only measures the value of a company's equity.
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What is Enterprise Value?
Enterprise value is the total value of a company, including all of its debt, equity, and preferred stock. It is calculated as follows:
Enterprise Value = Market Capitalization + Net Debt + Preferred Stock + Minority Interest
Market capitalization is the total value of a company's outstanding shares. Net debt is the difference between a company's total debt and its cash and cash equivalents. Preferred stock is a type of stock that gives shareholders certain preferences, such as priority dividends and liquidation rights. Minority interest is the ownership interest of non-controlling shareholders in a subsidiary company.
What is Equity Value?
Equity value is the value of a company's equity, which is the ownership interest of shareholders. It is calculated as follows:
Equity Value = Market Capitalization
In other words, equity value is simply the total value of a company's outstanding shares.
When to Use Enterprise Value vs. Equity Value
Enterprise value is typically used when evaluating a company's overall value, such as in a merger or acquisition. It is also used to calculate certain financial ratios, such as EV/EBITDA and EV/Sales.
Equity value is typically used when evaluating the value of a company's equity, such as when calculating return on equity (ROE). It is also used to calculate the ownership interest of shareholders in a company.
Example
Consider a company with the following financial data:
- Market capitalization: $100 million
- Net debt: $50 million
- Preferred stock: $10 million
- Minority interest: $5 million
The company's enterprise value would be calculated as follows:
Enterprise Value = $100 million + $50 million + $10 million + $5 million = $165 million
The company's equity value would be calculated as follows:
Equity Value = $100 million
Conclusion
Enterprise value and equity value are two important financial metrics that can be used to measure the value of a company. Enterprise value is a more comprehensive measure of value, as it takes into account all of a company's capital. Equity value, on the other hand, only measures the value of a company's equity.
Investors and analysts use both enterprise value and equity value to make informed investment decisions.
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