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.
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.
For more on this topic, see our full tutorial for EBIT vs. EBITDA vs. Net Income.
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.)