Last time we explored market multiples like P/E and EV/EBITDA. But what exactly is that "EV" we keep mentioning?
Understanding Enterprise Value versus Equity Value is crucial - they represent fundamentally different ways to measure a company's worth, and mixing them up leads to valuation errors.
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What single factor most clearly separates Enterprise Value from a stock’s price?
Equity Value represents what shareholders own. It's the total market value of all shares outstanding.
Think of it as the price tag for buying 100% of the company's stock. If ABC Corp has 10 million shares trading at $20 each, its Equity Value is $200 million.
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If you owned all the shares, what would you actually control?
But here's the catch: when you buy all shares, you also inherit the company's debts and get its cash.
Enterprise Value accounts for this reality. It represents the total cost to acquire the entire business - including paying off debts but getting the cash too.
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Why would debt make the acquisition more expensive?
The Enterprise Value formula is straightforward:
EV = Equity Value + Total Debt - Cash
Using our ABC Corp example: if they have $50M debt and $10M cash, then EV = $200M + $50M - $10M = $240M.
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What does the $240M represent in real acquisition terms?
Here's why this distinction matters enormously: Enterprise Value measures the operating business, while Equity Value includes financing decisions.
A company with identical operations but more debt will have higher EV but potentially lower equity value per share.
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Which value better reflects pure business performance?
This is why we use EV-based multiples (like EV/EBITDA) when comparing companies with different capital structures.
P/E ratios can be misleading when comparing a debt-heavy company to a debt-free one, but EV/EBITDA gives a cleaner operational comparison.
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Why do bankers usually favor EV multiples for comparisons?
When should you use each? Use Equity Value multiples (like P/E) when analyzing from a shareholder perspective.
Use Enterprise Value multiples (like EV/EBITDA) when comparing business operations or potential acquisitions across companies with different debt levels.
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Which perspective matters more for your investment decisions?
Type
Fill In The Blanks
Markdown With Blanks
Let's calculate Enterprise Value! TechCorp has the following:
- 20 million shares at $15 each
- $80 million in debt
- $20 million in cash
Equity Value = 20M × $15 = [[blank:$300M]]
Enterprise Value = $300M + $80M - [[blank:360M]]
Suggested Answers
- $300M
- $20M
- $360M
- $80M
- $280M
