Enterprise value · 5 min read

Enterprise value vs equity value: the difference and the bridge

Equity value is what the shares are worth. Enterprise value is what the core business is worth to everyone who has funded it. Interviewers test whether you understand that difference, not just the formula.

An everyday example

You buy a flat for £300,000 with a £60,000 deposit and a £240,000 mortgage. The flat is worth £300,000 whoever paid for it: that's like enterprise value. Your stake is £60,000: that's like equity value. Change the size of the mortgage and your stake changes, but the flat is worth the same.

The bridge

Start with equity value (share price × diluted shares).
Add other investors' claims on the business: debt, preferred shares, non-controlling interest.
Subtract non-core assets: cash and investments in associates.

The trick question

"If a company raises £100m of debt and keeps it as cash, what happens to enterprise value?" Nothing. Debt rises £100m and cash rises £100m, and they cancel out. Enterprise value only changes when the business itself is worth more or less.

Which multiples go with which

Pair enterprise value with metrics that belong to all investors (revenue, EBITDA, EBIT). Pair equity value with metrics that belong only to shareholders (net income, so P/E).

Check you've got it

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