In corporate finance, the most common types of value are equity and enterprise value. Enterprise value is the value of the operational business, independent of capital structure. Equity value (or market capitalization) is the value attributable to the owners or shareholders (frequently expressed on a per share basis for public companies).
Assets = liabilities + equity
Since enterprise value is the fair value of the net operational assets, the equation can be expanded to identify these components as follows:
Operating assets + cash = operating liabilities + debt + equity
If the equation is rearranged, the operating components can be isolated:
Operating assets – operating liabilities = debt – cash + equity
Balance sheet amounts are book or carrying value but for valuation all components must be at market or fair value. We assume that cash is excess cash and part of the capital structure.
The relationship between enterprise and equity value can be summarized as follows:
Since enterprise value equals net debt plus equity value, enterprise value can be derived from equity value and vice versa. In trading comparables, for example, the starting point is the calculation of equity value and from this enterprise value is derived. A discounted cash flow valuation, on the other hand, calculates enterprise value from which equity value is derived. This is summarized below:
Equity value + net debt = enterprise value or
Enterprise value – net debt = equity value
Have you read “Business Valuation Overview” yet?