How to Calculate Enterprise Value: Examples for Target, Vivendi, and Zendesk (24:00)

You’ll learn how to calculate Enterprise Value starting with Equity Value for three very different companies: Target, Vivendi, and Zendesk. You’ll learn how to treat items like pensions, operating leases, net operating losses, convertible bonds, and more.

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 the company’s core business operations (i.e., Net Operating 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 EVERYTHING the company has (i.e., Net Assets), but only to the 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 the TEV / EBITDA multiple.

Enterprise Value is important because it is not affected by a company’s capital structure – only by its core-business operations.

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Here’s a simple example of how to calculate Enterprise Value:

What is Enterprise Value?
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 calculate Enterprise Value, you subtract Non-Operating Assets – just Cash in this case – and you add Liability & Equity line items that represent other investor groups – Debt and Preferred Stock in this case.

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 notes below:

How to Calculate Enterprise Value
Enterprise Value would change only if the company’s Net Operating Assets changed.

For example, if the company bought a new factory using its Cash balance, that would affect its PP&E (Plants, Property & Equipment) and Cash.

PP&E is considered an Operating Asset, so it affects Enterprise Value, but Cash is a Non-Operating Asset, so it does not affect Enterprise Value.

Cash decreases and PP&E increases, so the company’s Net Operating Assets increase as a result.

Therefore, the company’s Enterprise Value also increases.

However, the company’s Equity Value does not change because Operating vs. Non-Operating Assets do not affect the Equity Value calculation. Only the company’s Net Assets matter.

For more on this concept, please see our coverage of Equity Value vs. Enterprise Value.

How to Calculate Enterprise Value for Real Companies

We receive many questions about Enterprise Value vs. Equity Value, but we also get many questions about how to calculate Enterprise Value.

When you’re analyzing public companies, you normally start by calculating the Equity Value for each company and then creating a “bridge” to Enterprise Value.

This process should not be difficult if you follow the standard formula for Enterprise Value:

  • Enterprise Value = Equity Value – Non-Operating Assets + Liability and Equity Items That Represent Other Investor Groups (i.e., ones besides Common Shareholders)

Ideally, you will use the market values of these items, but if they’re not available, the book values fine for everything except Equity Value.

Common examples of items in each category include:

  • Non-Operating Assets: Cash, Financial Investments, Rental Properties (if it’s not a real estate company), Side Businesses, Assets Held for Sale, Discontinued Operations, Equity Investments or Associate Companies, and Net Operating Losses (NOLs) (a component of the Deferred Tax Asset).
  • Liability and Equity Items That Represent Other Investor Groups (i.e., ones beyond common shareholders): Debt, Preferred Stock, Finance or Capital Leases, Noncontrolling Interests, Unfunded Pensions, and (potentially) Operating Leases.

If you find something not on this list that you want to add or subtract, you should proceed very carefully because there are not that many “special items.”

The company’s Balance Sheet is your starting point for this exercise, but you’ll need to go beyond it to find items like the Fair Market Value of Debt, details on the Pension Plans, and the Net Operating Losses embedded in the Deferred Tax Asset.

How to Calculate Enterprise Value: Example Calculations for Target, Zendesk, and Vivendi

Here are examples of how to calculate Enterprise Value for Target, Zendesk, and Vivendi, starting with Target:

Target - Equity Value to Enterprise Value

This Enterprise Value calculation for Target is a fairly standard bridge. A few notes:

  • Debt: The company initially grouped Debt and Capital/Finance Leases on its Balance Sheet, so we separated them and found the Fair Market Value of the Debt portion, which is used in this bridge.
  • Pensions: We count only the unfunded or underfunded portion, which equals MAX(0, Pension Liabilities – Pension Assets). We also multiply by (1 – Tax Rate) since contributions into pension plans are tax-deductible in the U.S.
  • Operating Leases: We choose not to count this item as “another investor group” here; it could go either way under U.S. GAAP, as long as you’re consistent in the valuation multiples.

For Zendesk, we use the following Enterprise Value bridge:

Zendesk - Equity Value to Enterprise Value

  • Net Operating Losses: We found these by searching for the Deferred Tax Asset disclosures. They’re considered “non-operating” because they’re not required to run the business and do not flow through the statements automatically, as other components of the DTA do. Technically, we should adjust the NOLs and remove the portion that is unlikely to be utilized, but this is not necessary in a quick analysis.
  • Total Debt: The company’s Convertible Bonds do not create dilution in this case because the company’s current share price is below the conversion price. Therefore, we count the entire Fair Market Value of the Convertible Bonds as Debt in the Enterprise Value calculation (you would use a similar approach with convertible notes for a startup).

Finally, we use this Enterprise Value calculation for Vivendi:

Vivendi - Equity Value to Enterprise Value

  • Equity Investments and Noncontrolling Interests: We took both of these directly from the Balance Sheet because the company did not disclose their Fair Market Values in a straightforward way. For more on these, please see our tutorial to the equity method of accounting.
  • Total Debt: We took the Balance Sheet number and replaced portions of it with the Fair Market Value numbers the company disclosed.
  • Unfunded Pensions: Similar to Target, this is MAX(0, Pension Liabilities – Pension Assets). But we do not multiply by (1 – Tax Rate) here, under the assumption that contributions into most European pension plans are not tax-deductible.
  • Operating Leases: We count them as “another investor group” here. The reason is that under IFRS, companies must split the rental expense into Interest and Depreciation elements on the Income Statement, so Operating Leases must be included in Enterprise Value – or multiples such as TEV / EBITDA will be inconsistent. For more, please see our lease accounting tutorial.

We sometimes get questions about other items that might potentially be counted in the Enterprise Value calculations, but there’s rarely a good reason to go outside the standard set.

Goodwill & Other Intangibles should never be in here, nor should DTAs (except for the NOLs) or DTLs; Industry-Specific Assets (such as “Content Assets” for media companies like Vivendi and Netflix) are Operating Assets, so they should also not be here.

Sometimes people add items like Legal and Restructuring Liabilities, and you may need to look at an item like “Provisions” in more detail to see what’s in it.

We cover some of these items and more advanced, special cases in the full courses on this site.

About Brian DeChesare

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.