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Enterprise value vs equity value

Equity value is the residual claim. Enterprise value is that claim plus interest-bearing debt minus surplus cash, the value of the operations before asking who funded them. On $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, EV is $130,000,000. Against $10,000,000 of EBITDA that is 13 times.

 Equity valueEnterprise value
What is being pricedThe residual after debt.The operations, independent of how they were funded.
Teaching sheet$100,000,000 of equity.$130,000,000 of EV, after $40,000,000 of debt and $10,000,000 of cash. Net debt $30,000,000.
No surplus cashStill $100,000,000.$140,000,000. The $10,000,000 of cash on the first sheet had been worth that much of EV.
MultipleP/E, which is equity over earnings after interest.EV/EBITDA. On the first sheet, $130,000,000 over $10,000,000 is 13 times. Raise EBITDA to $13,000,000 and it is 10 times.
What a DCF of FCF explainsA DCF of cash to equity explains equity value.A DCF of unlevered free cash flow explains enterprise value.
Mixing themLining P/E up next to EV/EBITDA is two claims on two profit lines.Same trap from the other side. One prices the residual. The other prices the operations.
On this page

One identity, two claims

Enterprise value is equity plus debt minus cash. On $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, net debt is $30,000,000 and EV is $130,000,000. Against $10,000,000 of EBITDA that is 13 times.

Set cash to $0 and EV is $140,000,000. Hold EV at $130,000,000 and raise EBITDA to $13,000,000: the multiple is 10 times. The stock identity did not move. The flow did.

Match the multiple to the claim

P/E prices the residual after interest. EV/EBITDA prices the operations before it. How enterprise value works is the long form, with the calculator under the answer. How the P/E ratio works is the equity multiple. How DCF works is the model that tries to say what the operations are worth from the cash they will produce. This is educational material, not financial advice.

Worked examples

Equity, debt and cash on one sheet

Equity is $100,000,000, interest-bearing debt is $40,000,000, surplus cash is $10,000,000, and EBITDA is $10,000,000. What is enterprise value, and what is EV/EBITDA?

  1. Net debt is debt minus cash: 40000000−10000000=3000000040000000 - 10000000 = 30000000, so $30,000,000.
  2. Enterprise value is equity plus net debt: 100000000+30000000=130000000100000000 + 30000000 = 130000000, so $130,000,000.
  3. The same figure the other way: equity plus debt minus cash, 100000000+40000000−10000000100000000 + 40000000 - 10000000.
  4. EV/EBITDA is 130000000/10000000=13130000000 / 10000000 = 13.

Enterprise value is $130,000,000. Net debt is $30,000,000. EV/EBITDA is 13 times.

The same sheet with no surplus cash

Keep equity at $100,000,000, debt at $40,000,000 and EBITDA at $10,000,000. Cash is now $0. What is enterprise value?

  1. Net debt is the full $40,000,000, because nothing is subtracted.
  2. Enterprise value is 100000000+40000000=140000000100000000 + 40000000 = 140000000, so $140,000,000.
  3. EV/EBITDA is 140000000/10000000=14140000000 / 10000000 = 14.

Enterprise value is $140,000,000, and the multiple is 14 times. The $10,000,000 of cash on the first sheet had been worth exactly that much of EV.

The same EV against a higher EBITDA

Back to $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, so enterprise value is still $130,000,000. EBITDA is now $13,000,000. What is the multiple?

  1. Enterprise value does not move: it is a stock identity, not a flow. It stays $130,000,000.
  2. EV/EBITDA is 130000000/13000000=10130000000 / 13000000 = 10.

The multiple is 10 times. Enterprise value is still $130,000,000. The identity did not change; the denominator did.

Common questions

Is equity here book or market?

Whichever you type. A deal model usually wants market. A classroom identity often uses book. On the first sheet, $100,000,000 of equity plus $30,000,000 of net debt is $130,000,000 either way you labelled the equity.

Why subtract cash?

Because surplus cash is not an operating asset on the usual teaching sheet. A buyer who pays equity value receives the cash, so the price of the operations is equity plus debt minus that cash. $10,000,000 of cash takes $10,000,000 off EV.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.