How it works
Equity value is what belongs to shareholders. Enterprise value adds net debt and other claims. Because EV ignores how a business is funded, it lets you compare companies with different amounts of debt. That is why multiples such as EV/EBITDA use it.
To move from EV to equity value, subtract net debt (debt minus cash), debt-like items, and the value of minority interests and preference shares.
Enterprise value = Equity value + Net debt (+ minority interests + preference shares)
A simple example
How it is used
- Calculating EV/EBITDA and other enterprise multiples.
- Comparing companies with different debt levels.
- Setting the price in an acquisition.
Common mistakes
- Forgetting to subtract cash.
- Ignoring debt-like items such as unpaid tax or employee end-of-service provisions.
- Pairing EV with an equity measure. EV/EBITDA is consistent. EV/Net income is not.
- Using an out-of-date balance sheet.
Questions
Why is enterprise value better than market cap?
Market cap only covers shareholders' claims. A company with a lot of debt can look cheap on market cap and still be expensive overall. EV includes the debt.
Can enterprise value be negative?
Yes. If cash is larger than market cap plus debt, EV is negative. It is unusual and often points to problems or special circumstances.
Keep learning
- What is EBITDA?
- What are valuation multiples (EV/EBITDA, P/E)?
- What is a DCF (discounted cash flow)?
- Guide: Business valuation
- Guide: Mergers and acquisitions
- Damodaran: EV/EBITDA multiples by sector
- Glossary: Enterprise value (EV)
- Glossary: Equity value
- Glossary: Net debt
- Glossary: Debt-like items
- Glossary: Market capitalisation (market cap)