Enterprise Value vs Equity Value: The Complete Explanation
Master the difference between Enterprise Value and Equity Value. Learn the formulas, when to use each, and how to answer common interview questions.
Understanding the difference between Enterprise Value and Equity Value is fundamental to finance. This is one of the most common interview questions, and getting it wrong can signal a lack of foundational knowledge. This guide will make sure you never confuse them again.
The Core Difference
The distinction is simple but crucial:
Note
Equity Value = Value to shareholders only (what you'd pay for all the shares)
Enterprise Value = Value to ALL capital providers (shareholders + debtholders)
Think of it this way: Equity Value is the "sticker price" for just the shares. Enterprise Value is the total economic value of the entire business, regardless of how it's financed.
The Formula
Enterprise Value = Equity Value + Total Debt - CashThis is the basic formula. For a more complete calculation, you also add Preferred Stock and Minority Interest.
Test Yourself
Interview Question
A company has $100M Equity Value, $50M debt, and $10M cash. What's its Enterprise Value?
The House Analogy
The best way to understand this concept is with a house purchase analogy:
- Equity Value = Your down payment (the equity you're buying)
- Enterprise Value = The total house price (your equity + the mortgage you assume)
Example
If a house costs $500K and has a $300K mortgage:
- Enterprise Value = $500K (total house price)
- Equity Value = $200K (your down payment / the seller's equity)
When you buy the house, you're paying $200K to the seller but taking on $300K of debt obligations.
When to Use Each
Matching Metrics Correctly
| Aspect | Enterprise Value | Equity Value |
|---|---|---|
| EBITDA | EV/EBITDA ✓ | Don't use |
| EBIT | EV/EBIT ✓ | Don't use |
| Revenue | EV/Revenue ✓ | Don't use |
| Net Income | Don't use | P/E Ratio ✓ |
| EPS | Don't use | P/E Ratio ✓ |
| Book Value | Don't use | P/Book ✓ |
Test Yourself
Interview Question
Why do we use EV/EBITDA to compare companies instead of P/E ratio?
The Cardinal Rule
Always match your multiple correctly:
- Enterprise Value pairs with pre-interest metrics (EBITDA, EBIT, Revenue, Unlevered FCF)
- Equity Value pairs with post-interest metrics (Net Income, EPS, Book Value, Levered FCF)
Understanding EV vs Equity Value is essential for all valuation work—it's tested in every finance interview.
Advanced Concepts
Test Yourself
Interview Question
Can Enterprise Value ever be negative while Equity Value is positive?
Test Yourself
Interview Question
Which of the following multiple pairings is INCORRECT?
Test Yourself
Interview Question
If a company issues $100M in debt to buy back $100M in stock, what happens to Enterprise Value?
Quick Reference Table
Metric Pairing Guide
| Term | Definition | Note |
|---|---|---|
| EBITDA | Enterprise Value | Before interest |
| EBIT | Enterprise Value | Before interest |
| Revenue | Enterprise Value | Before interest |
| Unlevered FCF | Enterprise Value | Before interest |
| Net Income | Equity Value | After interest |
| EPS | Equity Value | After interest |
| Book Value | Equity Value | Equity holders only |
| Levered FCF | Equity Value | After interest |
Common Mistakes to Avoid
Warning
- Mixing metrics: Using EV/Net Income or P/EBITDA—these don't make sense
- Forgetting preferred stock: In detailed calculations, preferred stock should be added to EV
- Using wrong debt figure: Use total debt (short + long term), not just long-term debt
- Confusing market cap with equity value: They're the same for companies with only common stock, but not if preferred stock exists
Key Takeaways
Remember These Points
- Equity Value = value to shareholders = Market Cap
- Enterprise Value = value to all capital providers = EV = Equity + Debt - Cash
- Add debt because acquirer assumes debt obligations
- Subtract cash because it reduces net acquisition cost
- Match metrics correctly: EV with pre-interest, Equity with post-interest
Understanding EV vs Equity Value is foundational for finance interviews. Master this concept thoroughly—it comes up in valuation, M&A, LBO, and many other contexts.
Related Valuation Guides
- Walk Me Through a DCF — DCF gives you Enterprise Value, then bridge to Equity Value
- EV/EBITDA Multiple Explained — The most important EV-based multiple
- LBO Explained Simply — LBO models require understanding EV vs Equity Value