Enterprise value vs. equity value: Key differences and use cases

When you’re diving into business valuations, you’ll often hear about enterprise value (EV) vs. equity value. Understanding the difference between these two is essential for making informed financial decisions since it’s key to accurately assessing a company's total worth. Enterprise value accounts for a company’s market capitalization, debt, and cash reserves, while equity value focuses solely on the ownership stake held by shareholders.

Understand these concepts to gain valuable insights into which financial metrics to apply in various scenarios—whether evaluating investment opportunities, assessing acquisition targets, or making smart financial decisions for the business. We will also explore the use cases of each to help you enhance your ability to navigate the financial landscape of your business and drive your organization’s success.

Jump to:

• What is enterprise value?
• What is equity value?
• Biggest differences between enterprise value vs. equity value
• Use cases for enterprise value vs. equity value
• Boost productivity and enhance profitability
• Enterprise value vs. equity value FAQ

What is enterprise value?

Enterprise value measures a company's total worth, combining market capitalization with debt and subtracting cash and cash equivalents. Understanding enterprise value is crucial for evaluating potential acquisitions or mergers, as it provides a holistic view of the company's financial obligations and overall worth. 

This metric offers potential buyers and investors a complete understanding of what it would cost to acquire the company, considering all financial obligations and assets for a clearer snapshot of its overall value.

Enterprise value formula and calculation

The following calculations—for both EV and equity value—are tasks you’ll be delegating. To ensure accurate calculations, which enable better financial decision-making, consider investing in a holistic solution with integrated accounting.

That said, here’s a quick overview of how to calculate the enterprise value of a company: 

Enterprise value = Market capitalization + Total debt − Cash and cash equivalents

Here’s how it breaks down:

1. Market capitalization: Multiply the current share price by the total number of shares.
2. Total debt: Add all of the company’s short-term and long-term debt.
3. Cash and cash equivalents: Subtract the amount of cash and cash equivalents the company holds.

Plug these numbers into the formula to get the enterprise value.

What is equity value?

The total equity value of a company represents the total value of a company’s outstanding shares and essentially reflects the value of the ownership stake in the company. It is a crucial metric for shareholders as it indicates how much they would receive if the company were liquidated or sold. 

Unlike enterprise value, which includes the company's debt and cash in its calculation, equity value is solely concerned with the worth of the company's shares. Understanding an owner’s equity value helps investors gauge their shares' market value and make informed investment decisions.

Equity value formula and calculation

You can use the following formula for equity value calculation:

Equity value = Share price × Total number of shares outstanding

Share price is the current price of one share of the company’s stock. The total number of shares outstanding refers to shares issued by the company and held by shareholders.

Biggest differences between enterprise value vs. equity value

Here are some of the biggest differences between enterprise value and equity value to help clarify their distinct characteristics and applications.

Scope and impact

Enterprise value represents the total value of a company, including both equity and debt and excludes cash. EV represents the total expense involved in acquiring a business and offers a comprehensive view of the company's overall financial health and its capacity to generate cash flow to cover debt obligations.

Equity value focuses solely on the value of the company's shares outstanding, representing what shareholders own. It does not account for debt or cash, and its value is influenced directly by the company’s stock price and the number of shares.

Debt and cash flow

Enterprise value includes all forms of debt (short-term and long-term) and subtracts cash and cash equivalents. It provides a normalized measure of equity that is independent of a company’s capital structure, making it useful for comparing companies with different customer financing methods.

Equity value does not consider the company's debt—it focuses only on the stock's market value. This means it does not reflect how debt levels might affect cash flow or financial obligations, making it less comprehensive in assessing a company's total financial condition.

Valuation relevance

Enterprise value is often used in valuation multiples like EV/EBITDA, which offer a measure of value that incorporates both the equity and debt components of the company, providing a broader view of financial performance.

Equity value is commonly used in multiples like the P/E ratio, which directly reflects stock price and shareholder value but may not fully account for the impact of a company's debt and cash holdings.

Knowing these differences equips you with the knowledge and confidence needed to make smart business decisions that help your company in the long run.

Use cases for enterprise value vs. equity value

Both enterprise value and equity value play vital roles in financial analysis and investment decision-making, but they are applied in different contexts. Let's explore specific scenarios where these metrics are applied and why they matter for your decision-making.

Valuing private companies

Valuing private companies presents unique challenges since they don’t have publicly traded shares, making it difficult to determine equity value. In these cases, enterprise value becomes especially useful as it considers not just the ownership of the company, but its total financial health, including debt and cash holdings. Private company valuations often rely on ratios like EV/EBITDA to assess value without needing a stock price.

For instance, when Amazon acquired Whole Foods in 2017 for approximately $13.7 billion, the enterprise value was the focal point. Amazon factored in Whole Foods’ debt and cash holdings when determining the cost per customer acquisition. The deal encompassed both the equity value (reflecting shareholder ownership) and the assumption of Whole Foods' debt.

It ensured Amazon knew the full cost of acquiring the business beyond just the value of the shares. For Whole Foods' shareholders, the focus was more on the equity value, as Amazon was interested in what its shares were worth in the deal.

Mergers and acquisitions

In mergers and acquisitions (M&A), enterprise value and equity value are both critical in deal structuring and negotiation. Buyers typically look at enterprise value to determine the full cost of acquiring a business, considering not just its equity but also its debt, while sellers are more focused on the equity account’s value, which reflects the payout to shareholders.

For example, when Disney acquired 21st Century Fox, Disney’s offer was based on Fox’s enterprise value, which included Fox’s debt. The deal helped Disney ensure it was accounting for both Fox’s assets and liabilities. Meanwhile, Fox shareholders focused on the equity value to understand what it would receive per share in the buyout. 

Challenges arise when the two sides need to balance these metrics to strike a fair deal, particularly in adjusting for varying levels of debt or cash. Best practices include thoroughly vetting the company’s financial structure to ensure that the deal appropriately reflects both enterprise and equity value.

Boost productivity and enhance profitability for your midsize or enterprise business

Understanding the difference between enterprise value and equity value is crucial for making informed financial decisions that can boost productivity, simplify accounting processes, and enhance profitability. 

Whether you're valuing a private company or preparing for a merger, having a clear grasp of these metrics helps you assess your business from every angle. If you’re ready to streamline your business operations and improve decision-making, try an ERP solution like Intuit Enterprise Suite.