Enterprise value vs equity value
“How is enterprise value different from equity value?”
Almost every valuation question builds on this one. The interviewer wants to hear who each number belongs to, not just the formula.
Equity value is the shareholders' slice. Enterprise value is the whole operating business, whoever funded it.
The house analogy
You buy a $500,000 house with $100,000 of your own money and a $400,000 mortgage. The house is worth $500,000: that's enterprise value. Your stake is worth $100,000: that's equity value. If you also keep $20,000 of cash in a drawer inside the house, a buyer of the house effectively gets that cash back, so it doesn't count toward what the house itself is worth.
Companies work the same way. Equity value is what the shares are worth: share price × diluted shares. Enterprise value is the value of the operations to everyone with a claim on them: shareholders, lenders, preferred holders and minority owners.
Why bankers prefer EV for comparisons
Take two identical bakeries, each earning $50 of EBITDA. One is debt-free; the other borrowed heavily. Their equity values differ because the lender owns part of the second bakery's value. But the bakeries themselves are identical, so their enterprise values should match. That's why EV is called capital-structure neutral, and why we pair it with EBITDA, which is also measured before any payments to lenders.
- 1Company A: no debt, $50 of cash → equity value = 800 + 50 = $850.
- 2Company B: $300 of debt, $50 of cash → equity value = 800 − 300 + 50 = $550.
- 3Both have EV = $800; only the split between owners and lenders differs.
“EV is what it costs to buy the company” is a handy shorthand, but be ready to explain it: a buyer pays the equity holders, then takes on the debt and gets the cash, so the net cost is roughly EV.
Say it like this
Equity value is the value of the company that belongs to its common shareholders: share price times diluted shares. Enterprise value is the value of the core business to all capital providers: equity holders, lenders, preferred stockholders and minority owners. To get from equity value to enterprise value you add debt, preferred stock and noncontrolling interests and subtract cash. Bankers use EV to compare companies because it isn't affected by how each one is financed.
Traps to avoid
- ✕Saying EV is “equity plus debt” and forgetting to subtract cash.
- ✕Pairing EV with net income or equity value with EBITDA. Mismatched multiples are an instant red flag.
- ✕Claiming EV can't be negative. It can, when cash exceeds equity value plus debt.
What they'll ask next
›Can enterprise value be negative?
Yes, for a company with a huge cash pile relative to its market value: the market is valuing the operations below zero. Equity value can't really go below zero.
›Is market cap the same as equity value?
For a public company, yes: share price × diluted shares. Book value of equity is a different, historical-cost number.
›Which changes when a company takes on debt?
In theory, how EV is split changes, not EV itself, unless the money is spent on operating assets.
Check yourself
What's the difference between equity value and enterprise value?
Put it all together
Count every share, run the full bridge, and judge the multiple against peers.