Full lesson
Explore the full explanation, examples, and visuals at your own pace.
One company, two measures of value
The same company can have two different values: equity value measures shareholders’ stake, while enterprise value measures the operating business across shareholders and lenders. Debt adds to the claim; available cash offsets it.
Company figures at one point in time
Market cap is the market value of the company’s shares: one hundred million pounds. At that point, debt is thirty million pounds and cash is ten million pounds.
Chart values
| Balance or market value | £m |
|---|---|
| Market cap | 100 |
| Debt | 30 |
| Cash | 10 |
£100m + £30m − £10m = £120m
Enterprise value adds debt and subtracts cash from equity value: one hundred million pounds plus thirty million, minus ten million, equals one hundred twenty million pounds, capturing value for both debt and equity holders.
Chart values
| Bridge component | £m |
|---|---|
| Equity value | 100 |
| Add debt | 30 |
| Less cash | -10 |
| Enterprise value | 120 |
If this company’s cash were five million pounds higher, with market cap and debt unchanged, what would happen to enterprise value?
Let's think this through. If this company’s cash were five million pounds higher, with market cap and debt unchanged, what would happen to enterprise value? A: It would fall to one hundred fifteen million pounds. B: It would rise to one hundred twenty-five million pounds. C: It would stay at one hundred twenty million pounds. Choose an answer, or just think it through.
I'll explain in a moment.
- It would fall to one hundred fifteen million pounds
- It would rise to one hundred twenty-five million pounds
- It would stay at one hundred twenty million pounds
If this company’s cash were five million pounds higher, with market cap and debt unchanged, what would happen to enterprise value?
The answer is A: It would fall to one hundred fifteen million pounds. Enterprise value subtracts cash. An extra five million pounds of cash reduces the original one hundred twenty million pound enterprise value by five million pounds, assuming market cap and debt stay fixed.
- It would fall to one hundred fifteen million pounds
- It would rise to one hundred twenty-five million pounds
- It would stay at one hundred twenty million pounds
Use the value that matches the claim
Enterprise value covers lender and shareholder claims, so it fits whole-business operating measures. Equity value covers shareholders’ claim, so it fits shares and shareholder earnings. The £120 million isn’t necessarily the payment to shareholders.
£100m for shareholders; £120m for the business
Use enterprise value for the operating business across debt and equity holders; use equity value for shareholders’ stake. Here, that’s £120 million versus £100 million.