Enterprise value vs. equity value

Q: Can enterprise value be negative? What would that mean?

Yes, if cash exceeds equity value plus debt. Usually a struggling company with lots of cash. Market expects the business to burn cash. Rare and often temporary.

Q: Why do we subtract cash when calculating enterprise value?

Cash isn't part of the core operating business. A buyer effectively gets the cash back. EV is meant to value operations only. Some argue only excess cash should be subtracted.

Q: A company issues $100 of stock and uses it to repay $100 of debt. What happens to equity value and enterprise value?

Equity value rises by $100. Debt falls by $100. Enterprise value is unchanged. Capital structure changes don't change the business's value.

Q: Which valuation multiples use enterprise value, and which use equity value?

EV/Revenue, EV/EBITDA, EV/EBIT use enterprise value. P/E and price/book use equity value. Match numerator and denominator to the same capital providers. Metrics before interest go with EV.

Q: A company's share price rises 10%. What happens to equity value and enterprise value?

Equity value rises 10%. Enterprise value rises by the same dollar amount. EV rises by less than 10% if the company has net debt. Debt and cash don't change.

Q: Why is EV/EBITDA used more often than P/E in banking?

Independent of capital structure. Lets you compare companies with different debt levels. EBITDA is closer to operating cash flow. P/E is affected by interest and one-time items.

Q: How do you calculate diluted shares using the treasury stock method?

Include in-the-money options and warrants. Assume they're exercised and the company receives the strike proceeds. Assume proceeds buy back shares at the current price. Net new shares = options − shares repurchased.

Q: How do you treat convertible bonds when calculating diluted shares and enterprise value?

If in the money, assume conversion into shares. Then remove the bond from debt to avoid double counting. If out of the money, keep it as debt. Check the conversion price against the share price.

Equity value is what the shareholders' stake is worth: share price × diluted shares. Enterprise value (EV) is what the whole operating business is worth to everyone who funds it, debt and equity together.

The bridge: EV = equity value + debt + preferred stock + noncontrolling interest − cash. Match multiples to the right numerator: metrics before interest (revenue, EBITDA, EBIT) go with EV; metrics after interest (net income, so P/E) go with equity value.

Enterprise value questions

Basic

What's the difference between enterprise value and equity value?

A strong answer covers

Equity value belongs to shareholders: share price × diluted shares
Enterprise value is the core business's value to all capital providers
EV = equity value + debt + preferred + noncontrolling interest − cash
EV pairs with EBITDA and revenue; equity value pairs with net income

Basic

Can enterprise value be negative? What would that mean?

A strong answer covers

Yes, if cash exceeds equity value plus debt
Usually a struggling company with lots of cash
Market expects the business to burn cash
Rare and often temporary

Intermediate

Why do we subtract cash when calculating enterprise value?

A strong answer covers

Cash isn't part of the core operating business
A buyer effectively gets the cash back
EV is meant to value operations only
Some argue only excess cash should be subtracted

Intermediate

A company issues $100 of stock and uses it to repay $100 of debt. What happens to equity value and enterprise value?

A strong answer covers

Equity value rises by $100
Debt falls by $100
Enterprise value is unchanged
Capital structure changes don't change the business's value

Intermediate

Which valuation multiples use enterprise value, and which use equity value?

A strong answer covers

EV/Revenue, EV/EBITDA, EV/EBIT use enterprise value
P/E and price/book use equity value
Match numerator and denominator to the same capital providers
Metrics before interest go with EV

Intermediate

A company's share price rises 10%. What happens to equity value and enterprise value?

A strong answer covers

Equity value rises 10%
Enterprise value rises by the same dollar amount
EV rises by less than 10% if the company has net debt
Debt and cash don't change

Intermediate

Why is EV/EBITDA used more often than P/E in banking?

A strong answer covers

Independent of capital structure
Lets you compare companies with different debt levels
EBITDA is closer to operating cash flow
P/E is affected by interest and one-time items

Advanced

How do you calculate diluted shares using the treasury stock method?

A strong answer covers

Include in-the-money options and warrants
Assume they're exercised and the company receives the strike proceeds
Assume proceeds buy back shares at the current price
Net new shares = options − shares repurchased

Advanced

Why do you add noncontrolling interest to enterprise value?

A strong answer covers

Parent owns over 50% of a subsidiary and consolidates 100% of its financials
EBITDA includes all of the subsidiary's earnings
Adding NCI makes EV consistent with the consolidated metrics
Same logic as matching numerator and denominator

Advanced

How do you treat convertible bonds when calculating diluted shares and enterprise value?

A strong answer covers

If in the money, assume conversion into shares
Then remove the bond from debt to avoid double counting
If out of the money, keep it as debt
Check the conversion price against the share price

Quick quiz (5 questions)

Equity value $500, debt $200, cash $50. Enterprise value is:

$750
$650 ✓
$550
$450

500 + 200 − 50 = 650.

Which multiple pairs with equity value?

EV/EBITDA
EV/Revenue
P/E ✓
EV/EBIT

Net income belongs to equity holders only, so P/E uses equity value.

A company borrows $100 and keeps it all as cash. Enterprise value:

Rises $100
Falls $100
Stays the same ✓
Doubles

Debt +100 and cash +100 cancel out. The business itself didn't change.

Share price $20 and 50 diluted shares. Equity value is:

$1,000 ✓
$70
$2.50
$100

20 × 50 = $1,000.

Which item is subtracted when going from equity value to enterprise value?

Debt
Preferred stock
Cash ✓
Noncontrolling interest

Cash is subtracted; debt, preferred stock and noncontrolling interest are added.

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Enterprise value vs. equity value

Enterprise value questions

What's the difference between enterprise value and equity value?

Can enterprise value be negative? What would that mean?

Why do we subtract cash when calculating enterprise value?

A company issues $100 of stock and uses it to repay $100 of debt. What happens to equity value and enterprise value?

Which valuation multiples use enterprise value, and which use equity value?

A company's share price rises 10%. What happens to equity value and enterprise value?

Why is EV/EBITDA used more often than P/E in banking?

How do you calculate diluted shares using the treasury stock method?

Why do you add noncontrolling interest to enterprise value?

How do you treat convertible bonds when calculating diluted shares and enterprise value?

Quick quiz (5 questions)

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