Enterprise Value vs Equity Value
One of the most common points of confusion in IB interviews, and one of the easiest places to lose points. Here is the difference, the exact bridge between them, a worked example, and the questions interviewers actually ask.
Equity Value
The value of the company that belongs to its shareholders. For a public company, this is the market capitalization: share price times diluted shares outstanding. It is what is left for equity holders after all other claims are settled.
Enterprise Value
The value of the entire operating business, available to all capital providers (both debt and equity). It is capital-structure-neutral, which is exactly why bankers use it to compare companies with different amounts of leverage.
The bridge between them
Enterprise Value = Equity Value + Net Debt + Preferred Stock + Minority Interest
+ Net Debt (total debt minus cash): debt holders have a claim on the business ahead of equity, so their stake is added. Cash is subtracted because it could be used to pay down the purchase price.
+ Preferred Stock: sits between debt and common equity in the capital structure, so it is added to reach the value of the whole business.
+ Minority Interest: when a company consolidates a subsidiary it does not fully own, the portion it does not own is added back so EV reflects the full consolidated operations its financials report.
To go the other way (EV to equity value), just reverse the signs: subtract net debt, preferred, and minority interest from enterprise value.
A worked example
A public company trades at $40 per share with 10 million diluted shares outstanding. It has $150M of total debt, $50M of cash, and no preferred stock or minority interest.
Equity Value = $40 x 10M = $400M
Net Debt = $150M debt - $50M cash = $100M
Enterprise Value = $400M + $100M = $500M
Notice that if this company used its $50M of cash to pay down $50M of debt, equity value would still be $400M and enterprise value would still be $500M (net debt is unchanged at $100M). The operating business did not change, so EV did not change. That is the capital-structure-neutrality interviewers want you to understand.
Which multiples use which
The rule: match the numerator to the denominator by who has a claim on it. Metrics available to all capital providers (before interest) pair with enterprise value. Metrics available only to shareholders (after interest and taxes) pair with equity value. Mismatching them is a classic interview trap.
- EV / EBITDA
- EV / EBIT
- EV / Revenue
- EV / Unlevered FCF
- P / E (Price / Earnings)
- Price / Book
- Equity Value / Net Income
- Equity Value / Levered FCF
Common interview questions
What is the difference between enterprise value and equity value?
Equity value is the value of the company that belongs to shareholders (the market cap for a public company). Enterprise value is the value of the entire business's core operations, available to ALL capital providers (both debt and equity holders). You get from one to the other through the bridge: Enterprise Value = Equity Value + Net Debt + Preferred Stock + Minority Interest. The key intuition is that enterprise value is capital-structure-neutral, so it lets you compare two companies with different amounts of debt on an apples-to-apples basis.
Why is enterprise value capital structure neutral?
Because it represents the value of the operating business itself, before deciding how that business is financed. If a company pays down debt with cash, its equity value is unchanged but the mix of debt and cash shifts, and enterprise value stays the same because the operating business hasn't changed. That neutrality is exactly why bankers default to EV-based multiples (like EV/EBITDA) when comparing companies with different leverage.
Does cash increase or decrease enterprise value?
Cash decreases enterprise value. EV uses NET debt (total debt minus cash and cash equivalents), so more cash means lower net debt and therefore lower enterprise value. The logic: if you acquired the company, you could use its cash to pay down part of the purchase price, so cash effectively reduces what the operating business costs you.
Which multiples use enterprise value and which use equity value?
Match the numerator to the denominator by who has a claim on it. Enterprise value pairs with metrics available to ALL capital providers, before interest: EV/EBITDA, EV/EBIT, EV/Revenue, EV/unlevered FCF. Equity value pairs with metrics available only to shareholders, after interest and taxes: P/E (price/earnings), price/book, equity value/levered FCF, price/net income. Mismatching them (e.g. EV/net income) is a classic interview trap.
If a company pays $100 of cash to pay down $100 of debt, what happens to enterprise value?
Nothing. Enterprise value is unchanged. Net debt = total debt minus cash. Paying down $100 of debt with $100 of cash reduces debt by $100 and reduces cash by $100, so net debt is flat, and equity value is also unchanged because no value left the business. The operating business is worth exactly what it was a moment ago.
Practice the full valuation question set
Enterprise value, equity value, the bridge, and 60+ more valuation questions with banker explanations of what interviewers are really testing. Free tier to start.