What is Equity Value Per Share?
The Equity Value Per Share is the market value of a company’s common equity expressed on a per share basis. Often used interchangeably with the term “market value per share”, the equity value per share standardizes a company’s equity value into a per-share basis.
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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.
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.
- Calculate Enterprise Value (TEV)
- Subtract Net Debt and Non-Equity Claims from Enterprise Value
- Determine the Total Number of Diluted Shares Outstanding Using the Treasury Stock Method (TSM)
- 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)
The formula to calculate equity value per share subtracts net debt from enterprise value, and then divides by the 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
