Equity Value vs. Enterprise Value and Valuation Multiples (10:24)
Learn how Equity Value and Enterprise Value change when a company issues debt, pays off debt, issues equity, and repurchases shares.
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The key point is that regardless of how a company is financed, its Enterprise Value – and Enterprise Value-based multiples – do NOT change. Equity Value, however, may change depending on its share count and any shares it issues or repurchases.
So even when a company changes its debt or equity or cash levels, valuation multiples such as EV / EBITDA and EV / Revenue will not change immediately afterward… whereas a multiple such as P / E (Price Per Share / Earnings Per Share, or Equity Value / Net Income) will change if new equity has been issued.
It’s just like when you buy a house – house is worth $500K regardless of whether you pay with 100% cash or 50% cash and 50% debt, or anything else in between… but depending on how much cash and debt you use, your own EQUITY IN THAT HOUSE will be different.
The $500K total value of the house is like the Enterprise Value for a company.
And if you contribute $250K of your own cash and take on a $250K mortgage, the $250K you chip in is your “Equity Value” and the $250K mortgage is the “Debt.”
Over time, your own “Equity Value” in that house will increase and your own “Debt” will decrease as you repay the mortgage, but the $500K total value for the house stays the same as long as the house’s intrinsic value remains the same.
This example uses Coca-Cola’s filings and financial statements – you can find them and try this yourself right here:
(NOTE: The numbers, of course, will be different if you look at this video at a later date, but the concept remains the same and has always been the same ever since Equity Value and Enterprise Value were invented.)