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Equity Value Per Share

Step-by-Step Guide to Understanding Equity Value Per Share

Last Updated February 20, 2024

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Equity Value Per Share

What is the Definition of Equity Value Per Share?

The equity value per share is the ratio between a company’s market value of equity and its total number of diluted shares outstanding.

That said, it should be intuitive that the equity value of a public company is calculated by multiplying its current stock price as of the latest closing date by its total diluted share count.

Common stock issuances represent partial ownership in the underlying issuer and trade freely in secondary markets post-IPO – i.e. after the formerly private company decides to “go public” via an initial public offering (IPO).

The stock price of a company constantly fluctuates based on the current market sentiment among investors regarding the fundamentals of the issuer, the outlook on its long-term financial performance, among other factors.

Hence, the existing shareholders of the publicly-traded company with a vested interest, and potential investors, closely monitor the movement in stock price.

How to Calculate Equity Value Per Share

So why calculate the equity value per share if the stock price is readily observable in real time?

The equity value, often referred to as market capitalization (or “market cap”), represents the fair value of a company’s common equity as of the most recent market close.

In short, the market could potentially be wrong, and the current stock price of a company could be mispriced, from the perspective of an investor (i.e. fairly valued, overvalued, or undervalued).

However, the fair value of a company is subjective, where the estimation is based on discretionary assumptions specific to an individual.

The process to calculate the equity value per share involves the following steps.

  1. Calculate Enterprise Value (TEV)
  2. Subtract Net Debt and Non-Equity Claims from Enterprise Value
  3. Determine the Total Number of Diluted Shares Outstanding Using the Treasury Stock Method (TSM)
  4. Divide Equity Value by the Total Number of Diluted Share Count

In theory, the equity value per share should be equivalent to the current stock price observed in the open markets, assuming the shares of the company are trading at their fair value, and all market participants share the same perspective on share count.

Yet in reality, the two figures are more often than not different because of the share count variable that is used to compute the equity value metric (i.e. diluted vs. non-diluted).

Therefore, the main use-case of measuring the equity value per share is intended for forecasting purposes – i.e. the estimated market-independent intrinsic value of a company – or in other instances, for private companies.

Learn More → Estimating Equity Value Per Share (Source: Damodaran)

Equity Value Per Share Formula

The formula to calculate equity value per share is as follows.

Equity Value Per Share = (Enterprise Value – Net Debt) ÷ Total Number of Shares Outstanding

The enterprise value is adjusted to remove all non-equity claims, which can include net debt (i.e. total debt minus cash), preferred stock and non-controlling interest.

The number of shares outstanding is most often determined using the treasury stock method (TSM).

The treasury stock method (TSM) assumes that the potentially dilutive securities of a company, such as convertible debt, warrants, and options, are converted into common shares.

Afterward, the company is assumed to allocate the proceeds received to purchasing shares to reduce the impact of dilution from newly issued shares post-conversion.

Unlike the enterprise value metric, the equity value is only attributable to shareholders who invested in the common equity issued by a company.

To convert from enterprise value to equity value, the value of non-equity claims must be subtracted.

  • Enterprise Value = Equity Value – Net Debt – Preferred Stock – Minority Interest
  • Net Debt = Gross Debt and Interest-Bearing Securities – Cash and Cash Equivalents

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Book Value Per Share (BVPS) vs. Equity Value Per Share: What is the Difference?

The difference between the equity value per share and the book value per share (BVPS) is as follows.

  • Equity Value Per Share → The equity value per share is the fair market value (FMV) of a company’s common stock, reflecting forward-looking investor sentiment regarding its fundamentals, growth prospects, and more. The market value per share, compared to the book value per share, is substantially greater in most cases because the value is constantly fluctuating based on the most recent prices that investors in the market have paid to purchase a share.
  • Book Value Per Share (BVPS) → The book value per share (BVPS) is the book value of equity, i.e. the “Shareholders’ Equity” line item on the balance sheet”, divided by the total number of shares outstanding. The book value of equity, as implied by the name, is the equity value recorded on the balance sheet for bookkeeping purposes. Contrary to the equity value, the book value of equity (and BVPS) is a historical, backward-looking metric determined using reporting guidelines established by accrual accounting (U.S. GAAP).

Equity Value Per Share Calculator

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Equity Value Per Share Calculation Example

Suppose we’re estimating the intrinsic value of a publicly traded company using a discounted cash flow (DCF) model to determine if its shares are currently fairly valued, undervalued, or overvalued by the market.

The output of the DCF model is as follows.

  • Enterprise Value (TEV) = $280 million
  • Net Debt = $40 million
  • Minority Interest = $10 million
  • Preferred Stock = $5 million

By subtracting net debt, minority interest, and preferred stock – all non-equity claims – from enterprise value, the implied equity value is $225 million.

  • Implied Equity Value = $225 million

The total number of diluted shares outstanding determined using the treasury stock method (TSM) will be assumed to be 20 million.

  • Total Diluted Shares Outstanding = 20 million

The equity value per share derived from the DCF model is $11.25, which we calculated by dividing the implied equity value by the number of shares outstanding.

  • Equity Value Per Share = $225 million ÷ 20 million = $11.25

The current stock price of the company is $10.00, which if compared to the equity value per share obtained from the DCF model, implies its shares are currently 12.5% undervalued.

  • Current Stock Price = $10.00
  • % Undervalued / (Overvalued) = ($11.25 ÷ $10.00) – 1 = 12.5%

Equity Value Per Share Calculator

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