Equity to Enterpise Value Brige
Introduction:
In this article, I am going to talk about the Enterprise Value (EV). Fistly, we will cover the concept of EV. Secondly, we will run our calculations to understand how to get to enterprise value from equity value or doing the opposite way, from equity value to enterprise value.
The concept of Enterprise Value
Before we dive into the Enterpise Value, we should understand the Equity to Enterpise Value Bridge. This mean we should understand the equity value, which is the market capitalization first. To understand the equity value can help us to calculate the EV at the end, since EV is comprised of Net Debt (Total Debt minus Cash and Cash equivalent) and Equity Value. You shouldn't be confused with both "values" here, eventhough their name might look similar to you.
Equity value is calculated by
Traded Shares Price x Number of Diluted Shares at "the end of the period".
(If the # of shares outstanding isn't explicitly given, then just use "number of shares issued - treasury stock or the number of shares in treasuary stock".)
Just like how its name stated, it is just the equity value, it only focus on the equity side. when a company decided to change its financial structual, for instance, increase its debt level, this will affect the equity value since the financial structure (debt + equity) has changed. It can also be affected by the company performance, industry dynamics and general enconomic factors.
Why do we care about enterpise value more than equity value for equity research?
As investors, it's important to understand enterprise value rather than solely focusing on equity value. We can interpret EV as the cost of acquiring a company, taking into account its assets and debt obligations while subtracting any cash that we could use to pay off debts. This cash can be seen as a discount inherent in the acquisition deal.
The enterprise value represents the worth of a company's core operating business, calculated by subtracting total operating liabilities from total operating assets. It solely focuses on the operations that are directly related to a company's main activities, such as production, and is not influenced by financing decisions. However, it is still influenced by factors like company performance, industry dynamics, and general economic conditions.