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How enterprise value works

Enterprise value is equity plus interest-bearing debt minus surplus cash. It is 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, enterprise value is $130,000,000. Against $10,000,000 of EBITDA that is 13 times.

Enterprise value

$130,000,000

13.00 times EBITDA

Equity
$100,000,000
Debt
$40,000,000
Cash
$10,000,000
Net debt
$30,000,000
Enterprise value
$130,000,000
EV / EBITDA
13.00x
$

Figures on this page are in millions of dollars.

$
$
$

Optional. When this is above zero, the multiple is enterprise value over EBITDA.

On this page

Next on Models and deals

Equity value from EV

In short

  • EV = equity + debt - 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.
  • The same $130,000,000 against $10,000,000 of EBITDA is 13 times. The identity is a stock. The multiple is a ratio of that stock to a flow.
  • Set cash to $0 and EV rises to $140,000,000. The multiple is 14 times. The $10,000,000 of cash on the first sheet had been worth exactly that much of EV.
  • Hold EV at $130,000,000 and raise EBITDA to $13,000,000. The multiple falls to 10 times. The operations were not repriced. The denominator moved.
  • Enterprise value prices the operations. Equity prices the residual. Do not line EV/EBITDA up next to P/E and call the gap a finding.

The operations, before asking who funded them

Enterprise value is a three-line identity:

EV=E+D−CEV = E + D - C

EE is the value of the equity, DD interest-bearing debt, CC surplus cash. Net debt is D−CD - C, so EV=E+net debtEV = E + \text{net debt}.

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.

A buyer who pays the equity value receives the cash, so the price of the operations is equity plus debt minus that cash. The enterprise value calculator on this page is that identity and the multiple when EBITDA is positive.

How DCF works is the model that tries to say what those operations are worth from the cash they will produce. EV is a snapshot of what the claims on those operations add up to today. How the P/E ratio works prices the residual after interest. The two multiples are not interchangeable.

Enterprise value and equity value are two prices for two claims. Enterprise value against equity value is the pair on one sheet: what debt and surplus cash do to the gap, and which multiple belongs on which number.

Cash is not always surplus, but on this sheet it is

Keep equity at $100,000,000, debt at $40,000,000 and EBITDA at $10,000,000. Set cash to $0. Net debt is the full $40,000,000. EV is $140,000,000. The multiple is 14 times.

The $10,000,000 of cash on the first sheet had been subtracted in full, so putting it back raises EV by exactly that amount. That is the teaching convention: surplus cash is not an operating asset. Cash a firm needs to run the operations is not surplus, and subtracting it would understate EV. Type the cash your sheet is treating as surplus.

The multiple is a ratio, not a price

Back to $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, so EV is still $130,000,000. Raise EBITDA to $13,000,000. The multiple is 10 times.

Enterprise value did not move. It is a stock identity. The flow in the denominator moved. A lower EV/EBITDA here is a more profitable year, not a cheaper firm, which is the same trap as a lower P/E from a higher EPS.

Free cash flow is what a DCF actually discounts. EBITDA is a starting point, not cash.

What this page is not doing

It is not a full net-debt bridge (leases, preferred, pensions), not a trailing-against-forward switch, and not a buy or sell. Type book equity or market equity, but say which. The three sheets are $130,000,000 of EV at 13 times, $140,000,000 with no surplus cash at 14 times, and $130,000,000 against $13,000,000 of EBITDA at 10 times. 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 this book equity or market equity?

Whichever you type. A deal model usually wants the market value of the shares. A classroom balance-sheet identity often uses book equity. The formula does not know the difference. 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. On this sheet, $10,000,000 of cash takes $10,000,000 off EV.

Where do leases and preferred stock go?

In a full bridge, often into net debt or as separate claims above equity. This page is the three-line identity: equity, interest-bearing debt, surplus cash. Adding a lease liability raises enterprise value by that amount, because it is another claim on the operations.

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.