What is the Difference Between Enterprise Value and Equity Value?

 

One of the most exciting components of running a business is watching your enterprise consistently increase in value over time. Eventually, you might find yourself wondering: just how much is my business worth?

As you might expect, there are actually many different ways you can potentially value of your business. Two of the most common types of business valuations are enterprise value and equity value. Each of these valuations has various uses and can be used in different situations.

What is Enterprise Value?

Usually, a business’s enterprise value will me notably higher than its equity. This is because enterprise value accounts for additional sources of capital (wealth) beyond just equity.

To calculate enterprise value, you will simply add the market cap to all debts currently that are currently held by the enterprise. There are many different sources of debt that may be used during this calculation, including interest owed, preferred shares, and other debts that are in the company’s name. And you can also contact BBLLP to get more related information they offers financial services saskatoon where you can all answers to your accounting queries’.

Theoretically, the enterprise value of your business represents how much your business is currently worth (what an outside buyer might want to pay for it). Valuing public companies can be a bit more difficult than valuing private companies, but there are several service providers who can guide and offers business valuation Saskatoon. Enterprise value is also very useful when trying to directly compare two different firms.

What is Equity Value?

Equity value is often compared to market capitalization. In some cases, you might hear people use these terms interchangeably, but doing so is a bit inaccurate. The primary difference between equity value and market cap is that market cap only accounts for common stock, whereas equity value also accounts for preferred stock.

To calculate equity value, you begin by adding enterprise value non-operating assets; after that, you subtract the debt, adjusted for the amount of cash that is currently available. In this situation, preferred shares—which are not accounted for when calculating market cap—will be treated the same as debt.

Whenever the value of a company’s stock changes, the company’s equity value will also change.

Deciding which Value to Use

As indicated, both enterprise value and equity value have different uses. Enterprise value is most useful when determining what the actual market price of a company might be. Enterprise value is often looked at by individuals executing mergers, acquisitions, and other comparable events.

Equity value is more useful for long-term business planning. It is typically the metric that is used internally, whereas enterprise value is the metric that is used externally. Owners will consider equity value to determine which financial decisions might be best for the company. They are also likely to consider equity value when applying for a loan or internally restructuring.

Taking the time to understand the difference metrics used by accountants and other decision makers can help your business make more accurate, informed decisions. At BBLLP, we seek to educate our clients and carefully answer each of the questions they may have, helping them elevate their enterprise to the next level. If you seek for accounting help than BBLLP is one of the best accounting firms Saskatoon.