It is very important to understand the difference between equity value and enterprise value as these are two very important concepts that nearly always come up in finance interviews. Simply put, enterprise value is the value of a company’s core business operations that is available to all shareholders (debt, equity, preferred, etc.), whereas equity value is the total value of a company that is available to only equity investors.
To calculate enterprise value from equity value, subtract cash and cash equivalents and add debt, preferred stock, and minority interest. Cash and cash equivalents are not invested in the business and do not represent the core assets of a business. In most cases, both short-term and long-term investments are also subtracted, however, this requires an analyst’s judgment and depends on how liquid the securities are. Debt, preferred stock, and minority interest are added as these items represent the amount due to other investor groups. Since enterprise value is available to all shareholders, these items need to be added back.
Given the enterprise value, one can work backward to calculate equity value.
