How to Calculate Enterprise Value: Enterprise Value Calculation
In this tutorial, you’ll learn how to calculate Enterprise Value based on a company’s Balance Sheet, using an example from Vivendi, the French telecom/media conglomerate.
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This tutorial will explain how to calculate Enterprise Value – but let’s start with the basics and explain what Enterprise Value is before getting into the numbers:
What is Enterprise Value?
Enterprise Value is the value of only the company’s core-business Assets, but to ALL INVESTORS (Equity, Debt, Preferred, and possibly others) in the company.
By contrast, Equity Value (also known as the Market Capitalization or “Market Cap”) is the value of ALL the company’s Assets, but only to EQUITY INVESTORS (common shareholders).
You use both these concepts in company valuations, and you often move between them in analyses.
For example, Unlevered Free Cash Flow in a DCF pairs with Enterprise Value, and you calculate the company’s implied Enterprise Value first and then back into its implied Equity Value and implied share price from that.
And in comparable company analysis, you use metrics and multiples that are based on Enterprise Value, such as EV / EBITDA.
Enterprise Value is important because it is not affected by a company’s capital structure – only by its core-business operations.
Here’s a simple example, along with the basic calculations:
The calculations for both Equity Value and Enterprise Value are shown above:
- Equity Value = Share Price * Shares Outstanding
- Enterprise Value = Equity Value + Debt + Preferred Stock + Noncontrolling Interests – Cash
To move from Equity Value to Enterprise Value, you subtract non-core-business Assets – just Cash in this case – and you add items that represent other investor groups – Debt and Preferred Stock in this case.
We point this out because many people do not understand this idea at all.
They incorrectly claim that you add Debt because it “makes the company more expensive,” or that you subtract Cash because it “makes the company cheaper to acquire.”
No, no, and no! Please see the screenshot below:
In the examples above, what would cause Enterprise Value to change?
Simple: if one of the company’s core-business Assets changed.
For example, if the company bought a new factory using its Cash balance, that would affect its PP&E (Plants, Property & Equipment).
PP&E is considered a core-business Asset, so the company’s Enterprise Value would increase as a result.
However, the company’s Equity Value would not change because core vs. non-core Assets do not matter in the Equity Value calculation.
For more on this concept, please see our coverage of Equity Value vs. Enterprise Value.
How to Calculate Enterprise Value from the Balance Sheet
The descriptions and formulas above are simplified, and the calculation gets more complex in real life.
The main challenges in how to calculate Enterprise Value include the following:
- It is not always clear whether or not an Asset falls into the “core business” category.
- It is not always clear whether or not Liability or Equity line items count as “other investor groups.”
- Sometimes not everything you need is shown directly on the Balance Sheet.
- And there are additional items that go into the calculation – beyond the Equity Value, Cash, Debt, Preferred Stock, and Noncontrolling Interests shown above.
To illustrate these added complexities, let’s walk through the Balance Sheet of Vivendi, a French telecom/media conglomerate.
First, the Equity Value calculation is simple: Shares Outstanding * Share Count.
There are questions of which share count you should use and how you should factor in dilutive securities such as options, warrants, and RSUs (Restricted Stock Units), but we are not focusing on those questions in this tutorial.
Instead, we’ll make it simple here and use the following information from Vivendi’s filings and Google Finance to calculate Equity Value:
Therefore, Equity Value = 23.60 EUR * 1,268.6 million diluted shares = 29.9 billion EUR.
Moving on, here’s Vivendi’s Balance Sheet – anything highlighted in yellow should be included in the Enterprise Value calculation, while other items either do not factor in or may factor in depending on their specific details:
The items highlighted in yellow are straightforward because we can pull them directly from the Balance Sheet.
Technically, it would be better to use the fair market value of Vivendi’s Debt rather than its book value, but it’s so close in this case (4,411 EUR vs. 4,336 EUR) that it doesn’t really matter:
The same applies to Noncontrolling Interests: use the fair market value if it’s available, but if not, the book value is acceptable, especially when it’s a low percentage of the company’s Total Liabilities & Equity.
The Equity Investments represent minority stakes that Vivendi owns in other companies – and once again, you should use the fair market value if it’s available.
Here, it appears that the company is already adjusting this item to market value, so we take it directly from the Balance Sheet:
Enterprise Value: The Trickier Items
Moving on, there are a few items on the Balance Sheet that are in the “maybe” category.
- Deferred Tax Assets (DTAs) – You should count the Net Operating Loss (NOL) component of this because it is considered a non-operating asset.
- Current and Non-Current Provisions – These have vague names that could refer to all sorts of Liabilities, including ones that might represent other investor groups.
- Other Non-Current Liabilities – See above.
Vivendi describes its Deferred Tax Assets under Note 6, but it does not clearly state how much of the DTAs corresponds to NOLs:
So, we ignore this item and move on to the next bits to check the “Provision” line items:
There’s no clear, 100% universal answer on these Restructuring and Legal line items, but we’ll count them in our calculation.
That gives us the following Enterprise Value calculations for Vivendi:
Unfunded Pensions in Enterprise Value: Wait, What? Why?!!
You might be wondering why Unfunded Pension Obligations count in the Enterprise Value calculation: how could they possibly represent another investor group?!
Easy: because the employees represent the investor group here.
Vivendi’s employees agree to work for the company at a below-market rate today in exchange for the promise of a defined-benefit pension plan in the future after they retire.
They give up money today earn something in the future – just like any other investor.
The company’s disclosures around the pension plan were very limited in this case, but if they had provided more information, we would have counted only the Unfunded portion.
For example, if the company had EUR 500 million in pension liabilities and had set aside EUR 200 million to cover them, we would have counted EUR 300 million for this number.
If contributions into this pension plan are tax-deductible, we also need to factor that in and tax-effect the number, but the tax treatment is not clear here.
Pension contributions tend to be tax-deductible in the U.S. but not in Europe, so we choose not to multiply by (1 – Tax Rate) in this case.
Enterprise Value Calculations from the Balance Sheet: Summary
Putting together all the pieces now, here’s a summary of how to calculate Enterprise Value based on Vivendi’s Balance Sheet: