What is the Equity Value to Enterprise Value Bridge?
The Equity Value to Enterprise Value Bridge illustrates the relationship between a company’s equity value and enterprise value (TEV).
Specifically, the bridge is created to reflect the variance between a company’s equity and enterprise value (and which factors contribute to the net difference).
How to Calculate Enterprise Value from Equity Value (Step-by-Step)
The two primary methods to measure a company’s valuation are 1) enterprise value and 2) equity value.
- Enterprise Value (TEV) → The value of a company’s operations to all stakeholders, including common shareholders, preferred equity holders, and providers of debt financing.
- Equity Value → The total value of a company’s common shares outstanding to its equity holders. Often used interchangeably with the term “market capitalization”, the equity value measures the value of a company’s total common equity as of the latest market close and on a diluted basis.
The difference between enterprise value and equity value is contingent on the perspective of the practitioner performing the analysis, i.e. the company’s shares are worth different amounts to each investor group type.
The equity value, often referred to as the market capitalization (or “market cap” for short), represents the total value of a company’s total common shares outstanding.
To calculate the equity value, the company’s current price per share is multiplied by its total common shares outstanding, which must be calculated on a fully-diluted basis, meaning that potentially dilutive securities such as options, warrants, convertible debt, etc. should be taken into consideration.
In contrast, enterprise value represents the total value of a company’s core operations (i.e. the net operating assets) which also includes the value of other forms of investor capital such as financing from debt investors.
On the other hand, to calculate a company’s enterprise value, the starting point is the company’s equity value.
From there, the company’s net debt (i.e. total debt less cash), preferred stock, and non-controlling interest (i.e. minority interest) are added to the equity value.
The equity value represents the entire company’s value to only one subgroup of capital providers, i.e. the common shareholders, so we’re adding back the other non-equity claims since enterprise value is an all-inclusive metric.
However, a critical concept to understand is that the addition of new debt does NOT increase a company’s enterprise value.
The reason is newly raised capital via debt financing flows directly into the cash balance of the company, so the two offset each other, since net debt is the difference between total debt and cash.
Equity Value vs. Enterprise Value: What is the Difference?
To reiterate the key points mentioned in the prior section – enterprise value is the value of a company’s operations to all capital providers – e.g. debt lenders, common shareholders, preferred stockholders – which all hold claims on the company.
Unlike the enterprise value, the equity value represents the remaining value that belongs to solely common shareholders.
The enterprise value metric is capital structure neutral and indifferent to discretionary financing decisions, making it well-suited for purposes of relative valuation and comparisons among different companies.
For that reason, enterprise value is widely used in valuation multiples, whereas equity value multiples are used to a lesser extent.
The limitation of equity value multiples is that they are directly impacted by financing decisions, i.e. can be distorted by capital structure differences rather than operating performance.
Learn More → Enterprise Value Quick Primer
Equity Value to Enterprise Value Formula
The following formula is used to calculate equity value from enterprise value.