Equity value (market capitalization for public companies) is the value of a company's shares alone. Enterprise value adds net debt (and other claims like preferred stock and minority interest) to equity value, representing the total value of the underlying business regardless of how it's financed.
Why It Matters
Confusing the two is one of the most common errors in valuation work — enterprise value is what an acquirer actually pays to take control of a business's operations (since they also assume its debt), which is why EBITDA and revenue multiples are built on enterprise value, not equity value. Getting this wrong produces valuation errors that can be off by the entire amount of a company's net debt.
How It Works in Practice
- 1Equity value = share price × shares outstanding (or the agreed price for a private company)
- 2Enterprise value = equity value + total debt + preferred stock + minority interest − cash and cash equivalents
- 3Subtracting cash reflects that an acquirer could immediately use it to pay down assumed debt
- 4EV/EBITDA and EV/Revenue are standard valuation multiples; P/E is calculated on equity value and net income instead
Common Pitfalls
Mixing an equity-value multiple (like P/E) with an enterprise-value metric (like EBITDA) in the same comparison produces a meaningless number
"Cash" subtracted in the EV bridge should be excess cash beyond what's needed to run the business — subtracting all cash can overstate the adjustment for cash-intensive operating models
Off-balance-sheet obligations (operating leases pre-ASC 842, pension underfunding, contingent liabilities) can materially understate true enterprise value if excluded
Related Terms
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