Knowledge Base: Equity Value & Enterprise Value Tutorials

Equity Value and Enterprise Value are key concepts in company valuation and analysis.

The simplest way to understand them is to think about buying a house: The “Equity Value” represents the “down payment,” while the “Enterprise Value” represents the total price of the home.

For example, if you buy a $500K home via a $100K down payment and a $400K mortgage, the Equity Value is $100K, and the Enterprise Value is $500K.

More formally, for companies, the Equity Value or Market Cap represents  the value of EVERYTHING a company has (Net Assets, or Total Assets – Total Liabilities), but only to EQUITY INVESTORS (common shareholders).

Enterprise Value is the value of the company’s CORE BUSINESS OPERATIONS (Net Operating Assets, or Operating Assets – Operating Liabilities), but to ALL INVESTORS (Equity, Debt, Preferred, and possibly others).

You can calculate the Equity Value with Share Price * Shares Outstanding for public companies; to move to Enterprise Value, subtract Cash and add Debt, Preferred Stock, and other long-term funding sources.

The significance of these concepts is that a company’s Equity Value may change if its capital structure changes (e.g., if it repurchases stock or issues stock), while its Enterprise Value stays the same even if the Cash, Debt, Stock, or other parts of the capital structure change.

Therefore, Enterprise Value is a better measure of the company’s “true worth.”

However, you need to understand both concepts because you move between them all the time in valuations and deal analyses.

We present below our set of samples, excerpts, and standalone tutorials on these concepts: