The core distinction
Think of a company as a house bought with a mortgage. The house price — what a buyer pays to acquire the whole asset, including assuming the mortgage — is analogous to enterprise value. The equity — the cash the buyer puts in after paying off the mortgage — is analogous to equity value.
| Enterprise Value | Equity Value | |
|---|---|---|
| What it represents | Total value to all capital providers | Value to equity holders only |
| DCF cash flow used | Free Cash Flow to the Firm (FCFF) | Free Cash Flow to Equity (FCFE) |
| Discount rate | WACC | Cost of equity (CAPM) |
| Multiples | EV/EBITDA, EV/Revenue, EV/EBIT | P/E, P/B, Dividend Yield |
The bridge: from EV to equity value
Net Debt = Total Debt + Preferred + Minority Interest − Cash
Worked example
Company A: market cap £800m, debt £300m, cash £50m.
| Market cap | £800m |
| + Debt | £300m |
| − Cash | (£50m) |
| = Enterprise Value | £1,050m |
EV/EBITDA (at £150m EBITDA) = 7.0×. P/E (at £60m net income) = 13.3×. Both are valid — they just answer different questions.
Why EV is preferred in M&A
EV is capital-structure neutral. Two identical businesses with different amounts of debt will have different market caps but the same EV. This makes EV multiples directly comparable across companies with different leverage, whereas P/E ratios are not. In a takeover, the acquirer pays EV — they buy the equity at the offer price and inherit the debt. Deal pricing is always expressed in EV terms.
What goes into net debt
The EV bridge is more nuanced than just debt minus cash. Analysts typically include: minority interest (economic claim not in market cap), preferred stock (closer to debt than equity), pension deficits (debt to pensioners), capitalised lease obligations (under IFRS 16 / ASC 842). Only truly excess cash reduces net debt — cash trapped overseas or needed for operations may not be freely available.
The equity value bridge in LBO analysis
In a leveraged buyout, the sponsor pays an EV at entry and realises equity value at exit. The IRR is on the equity invested — so the EV-to-equity bridge at both entry and exit is critical. A company with the same EV at entry and exit can still generate strong equity returns if debt is paid down, reducing net debt and increasing equity value even with a flat enterprise value.
Related Articles
- → How do you value a company? — the full valuation guide
- → EV/EBITDA — why enterprise value multiples dominate in practice
- → Comparable company analysis — EV multiples applied in a comps table
- → Precedent transactions — deal multiples are always quoted at EV
- → DCF valuation — discounting FCFF gives EV; FCFE gives equity value