Below are some of the key terms used in the context of business valuation terminology.
Enterprise Value (EV)
The sum of the company’s total market value of equity (also known as market capitalisation with regard to listed companies) plus preferred shares and debt (see illustration below).
Enterprise Value less Net debt.
Short term debt plus long term debt less surplus cash and cash equivalents
The formula illustrates the terms above:
Enterprise Value = Equity Value + Net Debt
What is the difference between Enterprise Value and Equity Value?
Enterprise Value (EV) is the price buyers are prepared to pay for the business, including any debt. Equity Value is the value attributable to shareholders after deduction of any debt, such as:
- Bank loans
- Invoice Discounting Facilities
- HP leases
The term “net debt” is applicable when the surplus cash (if there is any) in the business is “netted off” against the debt. Surplus cash is any cash or cash equivalents, which are in excess of the company’s working captial requirements.
We can illustrate this using the example of a property for sale:
Property Amount Business
Property Value Price £1,500,000 Enterprise Value
Mortgage (£500,000) Net Debt
Equity £1,000,000 Equity Value
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