ENTERPRISE VALUE VS

EQUITY VALUE
WHAT IS EQUITY VALUE?

 Equity Value is simply the Value of a firm’s equity i.e. the market Capitalization of the Firm. It
can be calculated by multiplying the market value per share by the total number of shares
outstanding.
 For example, let’s assume Company A has the following characteristics:

 Based on the formula above, you can calculate Company A’s Equity value as follows:
 $1,000,000 x 50 = $50,000,000
 However, in most cases this is not an accurate reflection of a company’s true value.
WHAT IS ENTERPRISE VALUE?
 Enterprise value considers much more than just the value of a company’s outstanding equity. It
tells you how much a business is worth. Enterprise value is the theoretical price an acquirer might
pay for another firm, and is useful in comparing firms with different capital structures since the
value of a firm is unaffected by its choice of capital structure. To buy a company outright, an
acquirer would have to assume the acquired company’s debt, though it would also receive all of the
acquired company’s cash. Acquiring the debt increases the cost to buy the company, but acquiring
the cash reduces the cost of acquiring the company.
 Enterprise Value = Market value of operating assets
 Equity Value = Market value of shareholders’ equity
 Net Debt – Net debt is equal to total debt less cash and cash equivalents.
 When calculating total debt, be sure you include both the long-term debt and the current portion of long-term
debt, or short-term debt. Any in-the-money (ITM) convertible debt is treated as if converted to equity and is
not considered debt.
 When calculating cash and equivalents, you should include such balance sheet items as Available for Sale
Securities and Marketable Securities,
 The market value of debt should be used in the calculation of enterprise value. However, in practice you can
usually use the book value of the debt.
Let me explain it with an example. Consider the same company A and an another company B having the same
market capitalization. We assume two scenarios, 1 and 2.

Calculate Enterprise Value for Scenario 1.

 Enterprise Value for Company A is Market Capitalization ($50 million) + Debt ($20 million) – Cash and Short
term investments ($0) = $70 million. EV for Company B is Market Capitalization ($50 million) + Debt ($0) –
Cash and Short term investments ($0) = $50 million.
 While both companies have the same market capitalization, the better buy is Company B, or the company
with no debt.
 Calculate Enterprise Value for Scenario 2.

 Calculate Enterprise Value for Scenario 2. EV for Company A is Market Capitalization ($50 million) + Debt
($0) – Cash and Short term investments ($5 million) = $45 million. EV for Company B is Market Capitalization
($50 million) + Debt ($0) – Cash and Short term investments ($15 million) = $35 million.

 While both companies have the same market capitalization and no debt, the better deal is Company B as you
would assume $15 million in cash upon purchase of the company.
 EQUITY VALUE VS ENTERPRISE VALUE MULTIPLES

What is Equity Value Multiple?

 Numerator – Equity Value is Price per share that shareholder’s are expected to pay for a single share
of the company under consideration

 Denominator – Operating parameters like EPS, CFS, BV etc equity measures. For example EPS –
Earnings per share and it reflects the profit per share that accrues to the shareholders.
 PE Multiple – This ‘headline’ ratio is in essence a payback calculation: it states how many years’
earnings it will take for the investor to recover the price paid for the shares. Other things being
equal, when comparing the price of two stocks in the same sector the investor should prefer the one
with the lowest PE.

 PCF Multiple – It is a measure of the market’s expectations of a firm’s future financial health. This
measure deals with cash flow, the effects of depreciation and other non-cash factors are removed.

 P/BV Multiple – Useful measure where tangible assets are the source of value generation. Because
of its close linkage to return on equity (price to book is PE multiplied by ROE), it is useful to view
price to book value together with ROE

 P/S Multiple – Price/sales can be useful when a company is loss making or its margins are
uncharacteristically low (distressed firms)

 PEG Multiple – PEG ratio used to determine stock’s value while taking into account earnings
growth. The enterprise value multiples have both the numerator and the denominator as “Pre Debt”
and “Pre-Equity” measure. Some of the multiples of Enterprise value multiples are as per below.
What is Enterprise Value or EV Multiples?

 Numerator – Enterprise Value is primarily a pre-debt and pre-equity measure as EV reflects values
both to the Debtors as well as Shareholders’.

 Denominator – Operating parameters like Sales, EBITDA, EBIT, FCF, Capacity are pre-debt and pre-
equity measures. For example EBITDA – Earnings “before” Interest tax depreciation and amortization;
this implies that EBITDA is measure before the debtors and shareholders are paid off and likewise.
 EV/EBITDA Multiple – Measure that indicates the value of the overall company, not just equity. EV
to EBITDA, is a measure of the cost of a stock which is more frequently valid for comparisons across
companies than the price to earnings ratio. Like the P/E ratio, the EV / EBITDA ratio is a measure of
how expensive a stock is.

 EV/Sales Multiple – EV/sales is a crude measure, but least susceptible to accounting differences. It is
equivalent to its equity counterpart, price to sales, where company has no debt

 EV/EBIT Multiple – EBIT is a better measure of ‘free’ (post-maintenance capital spending) cash flow
than EBITDA and is more comparable where capital intensities differ.

 EV/FCF Multiple – EV/FCF is preferable to EV/EBITDA for comparing companies within a sector.
Comparing across sectors or markets where companies have widely varying degrees of capital intensity

 EV/Capacity – Core EV/units of capacity (such as tonnes of cement capacity) or another revenue-
generating unit (such as subscribers).
Enterprise Value vs Equity Value – Overvalued or Undervalued?
There are primarily two ways in which fair valuation of the company can be arrived at using Relative
Valuation technique. They are Historical Multiple Method and Sector Multiple Method.

Historical Multiple M:ethod:

 The interpretations are relatively simpler if we create the Price to Earnings Graph. As noted above, the
Foodland Farsi current PE ~ 20x, however, the historical average PE was closer to 8.6x.
 Currently, the market is commanding $20/EPS (defined as PE); however, in the past this stock was
trading at $8.6/EPS. This implies that the stock is overvalued with PE = 20x, when compared with
historical PE = 8.6x and we may recommend SELL position on this stock.
Sector Multiple Method:
In this approach, we compare current multiples to those of other companies, a sector or a market. Below is
a hypothetical example to explain this methodology.

From the table above, the average PE multiple for IT sector is 20.7x. However, the company under
consideration – Infosys is trading at 17.0x. This implies that Infosys is trading below the average sector
multiple and a BUY signal is warranted.
Enterprise Value and Equity Value – Comparable Company Analysis:

 Below is a typical relative valuation table that an analyst is expected to produce as a part of research.
The comparison table contains the sector companies and their respective operating and valuation
parameters. In most cases, the parameters contained in the table are as per below

 Company Name
 Latest Price
 Market Capitalization
 Enterprise Value
 EBITDA
 Net Income
 Valuation Methodologies like PE, EV/EBTIDA, P/CF etc;
 Trailing & Forward Multiples are Calculated (2-3 years of multiples)
Mean & Median Multiple values:
The procedure to calculate a multiple can be simply summarized as below

 Though the above example is simple, however, for applying the same in real life scenario, one need to
establish the value and the value driver and make several adjustments to it.

Conclusion – Enterprise value vs Equity Value

 Both tools are important from the point of view of Valuations. Equity Value is the value only to the
shareholders, however, Enterprise value is the value of the firm that accrues to both the shareholders
and the debt holders (combined).
 In each company/sector, however, you there are 3-5 multiples (Enterprise value or Equity value or
both) can be applied. It is more important for you to know the usage and application of each multiple.

Thanks