Difference between Enterprise Value and Equity Value and practical applications

Enterprise Value (EV) and Equity Value (EV) are two key concepts in company valuation, especially in the case of startups. Both are used to determine the value of a company, but they do so in different ways.

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Enterprise Value

The Enterprise Value is the value of a company, also taking into account its net financial debt.
It is calculated by adding the total financial debt of the company to the value of its shares, while subtracting its cash and short-term investments.
The Enterprise Value represents the total value of a company, including both its operating and financial value.

Equity Value

Equity Value represents the value of a company from the shareholders’ perspective. It is calculated by multiplying the number of shares outstanding by the unit price of each share.

Why should an investor look at one or the other magnitude?

An investor should look at the Equity Value if he is interested in the value of the company from the shareholders’ perspective. This value is relevant for investors who hold shares in the company, as it tells them how much money they stand to gain if they sell their shares.

An investor should look at the Enterprise Value if he is interested in the total value of the company, including both its operating value and its financial value. This value is relevant for investors who are considering investing in the company, as it tells them how much money they have to pay to acquire the company.

What does an investor see in enterprise value that they don’t see in equity value?

Enterprise Value includes the company’s debt, while Equity Value does not. This means that Enterprise Value is a more complete indicator of a company’s value, as it takes into account both its ability to generate profits and its ability to meet its financial obligations.

In which types of companies is it more important to know (for an investor) enterprise value than equity value?

Enterprise Value is most important to know for investors in companies with a high level of debt. In these companies, debt can have a significant impact on the value of the company, so it is important to take this factor into account when valuing the company.

What type of debt should be included in enterprise value?

Enterprise Value includes all of the company’s debt, both financial debt and non-financial debt. Financial debt is the debt that the company has contracted with banks and other financial institutions. Non-financial debt is the debt that the company has contracted with suppliers, customers or employees.

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What is Loan To Value (LTV) and why is it relevant?

The Loan to Value (LTV) is a magnitude that represents the indebtedness of an asset in relation to its real and current value.

Differences between EV and Equity Value

The main difference between EV and Equity Value is that EV includes the company’s debt, while Equity Value does not. This is because EV represents the total value of the company, including both its operating and financial value. Equity Value, on the other hand, represents the value of the company from the shareholders’ perspective only.

Another difference between EV and Equity Value is that EV is often used to value companies in mergers and acquisitions, while Equity Value is often used to value companies in financing rounds.

Applications in startup valuation

In the case of startups, EV and Equity Value are used to determine the value of the company for the purpose of valuing the startup and selling the startup. This value is often used to negotiate the sale price.

In the sale of the startup, EV and Equity Value are used to determine the selling price of the company. The sale price is usually negotiated between the buyer and the seller, and is based on a number of factors, including EV and Equity Value.

Conclusion and final Advice

Not understanding the difference between these two concepts says a lot about the businessman or entrepreneur. Do not hesitate to consult a financial advisor or a commercial lawyer or M&A lawyer if you have any doubts.

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