Analyst Interview Group

Can Equity Value be higher than Enterprise Value ?

Yes, the equity value of a company can be higher than its enterprise value. This situation typically occurs when a company has a significant amount of cash and cash equivalents on its balance sheet that exceeds its total debt, preferred shares, and minority interest combined.

To understand why this is possible, it's important to understand the difference between equity value and enterprise value.

Equity value, also known as market capitalization, is the total value of a company's outstanding equity. It represents the value that accrues only to the shareholders of the company. It can be calculated by multiplying the market value per share by the total number of shares outstanding.

On the other hand, enterprise value is a measure of a company's total value, often used as a comprehensive alternative to equity market capitalization that includes debt. It is calculated by adding up the market capitalization, or market cap, plus all of the debts in the company, and then subtracting cash and cash equivalents.

Therefore, if a company's cash balance is larger than the sum of its debt, preferred shares, and minority interest, the enterprise value can be smaller than the equity value. This is not uncommon for profitable businesses without debt.

For example, suppose a company has a market cap (Current Equity Value) of $30 million, no Debt, and Cash of $35 million. In this case, the enterprise value would be negative, as the cash holdings exceed the equity value.

It's important to note that while equity value can provide a snapshot of both current and potential future value, enterprise value gives an accurate calculation of the overall current value of a business, similar to a balance sheet. Therefore, each offers a slightly different view and may be used in different contexts or for different purposes.