Key Definitions
Enterprise Value (EV) :Enterprise Value represents the total value of a company. It is calculated as:
Enterprise Value = Market Value of Equity + Net Debt
EV is often expressed as a multiple of EBITDA. These multiples are derived from sources such as:
- Company disclosures
- Financial data providers
- Equity analyst reports
- Industry publications
- Platforms like S&P Capital IQ
Net Debt
Net Debt = Cash on Balance Sheet – Gross amount of interest bearing debt
Market Value of Equity (Market Value, Market Capitalisation, Shareholders’ Value or Equity Value)
Market Value of Equity is calculated by subtracting net debt from enterprise value:
Market Value of Equity = Enterprise Value – Net Debt
It reflects the market’s valuation of the company’s equity and can be cross-checked using other ratios like Price/Earnings (P/E) or Market/Book multiples.
B. Determining EV and EBITDA Multiples
1. Public Companies
Publicly listed firms have observable market values, as their shares trade on stock exchanges. The market value of equity will then be added to either:
- The market value of net debt (if they have issued syndicated loans or bonds that are traded) or
- The book value of net debt (if debts and bonds are closely held by banks or investors and are not traded)
To get the Enterprise Value of the companies. Enterprise Value will be divided by EBITDA to drive its multiples and the average EBITDA Multiples of public companies will be the base for the valuation of private companies in the same industry.
Example:
Company ABC is listed with a share price of $12 and 4,000 outstanding shares.
- Market Value of Equity = 12 × 4,000 = $48,000
- Net Debt = $22,000
- Enterprise Value = 48,000 + 22,000 = $70,000
- EBITDA = $7,000
- EBITDA Multiple = 70,000 ÷ 7,000 = 10X
Public Company Steps:
- Market Value of Equity = Share price × Number of shares
- Enterprise Value = Market Value of Equity + Market Value of Debt
- EBITDA Multiple = Enterprise Value ÷ EBITDA
2. Private Companies
Private firms do not have a market-traded share price, so valuation is based on industry EBITDA multiples — typically discounted due to lower liquidity and transparency.
- Enterprise Value = EBITDA × EBITDA Multiples (discounted)
- Market Value of Equity = Enterprise Value – Book Value of Net Debt (debt/bonds are unlikely to be traded)
Example:
Industry EBITDA Multiple = 10X
Apply a discount → Private Company uses 8X
- Company XYZ EBITDA = $7,000
- Enterprise Value = 7,000 × 8 = $56,000
- Net Debt (book value) = $30,000
- Estimated Market Value of Equity = 56,000 – 30,000 = $26,000
Private Company Steps:
- Enterprise Value = EBITDA × EBITDA Multiples (discounted)
- Market Value of Equity = Enterprise Value – Book Value of Debt
C. Market vs Book Value of Equity
- Market Value of Equity reflects what shareholders receive upon selling their shares of the company.
- Book Value of Equity reflects the value of the company that belongs to shareholders based on historical accounting records.
- These 2 values are rarely the same.
- Market Value > Book Value, there is a premium and the market expects future growth
- Market Value < Book Value, there is a discount and the market anticipates weaker outlook
