Enterprise Value (EV) is a business’ total value, including equity and debt, but not cash and cash equivalents.

It’s often used for M&A situations where the phrase ‘debt-free and cash-free’ is often used in share sale and purchase terms. Likewise, it is often used in the market approach public comparables method. The data is usually Enterprise Value (but sometimes MVIC, see below) so this is the appropriate comparator to use.

In a public stockmarket listed company, the calculation is reasonably simple:
EV =
market capitalisation (share price times shares)
plus total short and long-term debt
less cash and cash equivalents (short-term investments such as shares in other listed companies)
less non-operating assets at market value

Diagram: Enterprise Value

It’s simple because the information is readily available. There is a debate as to whether an ‘operating level’ of cash should be included, so you need to be sure you understand the definition of the market comps database or other party in the transaction. Likewise, how non-operating assets are being treated.

How to Calculate the Enterprise Value of a Private Company

The International Glossary of Business Valuation Terms defines Invested Capital as “the sum
of equity and debt in a business enterprise. Debt is typically (a) all interest-bearing debt or (b)
long-term, interest-bearing debt.”

It doesn’t provide a definition of Enterprise Value which tells me there is no agreement as to the exact definition.

Calculating Enterprise Value in a Private Business is similar but it has some key differences.

Firstly, and as for all private business valuations, the information from the stockmarket is not available, you can’t easily calculate market capitalisation, the equity value, by multiplying share price by shares outstanding. You need to go through the complete business valuation process especially calculating the equity value.

Secondly, the formula we prefer to use is the Market Value of Invested Capital (MVIC), the formula of which is:
Market Value Invested Capital = debt plus equity
Or put another way:
MVIC =
cash and marketable securities
plus operating assets (tangible and intangible) at market value
plus non-operating assets at market value

Diagram: Market Value of Invested Capital

So it includes cash and non-operating assets. (By the way excess cash, cash not needed to operate the business, is regarded as a non-operating asset.)

I note that the International Glossary of Business Valuation Terms also doesn’t provide a definition of Market Value Invested Capital, so once again you need to check your sources as to what definition they are exactly using.

What is the difference between Enterprise Value and Equity Value?

The difference is usually the debt:
Equity Value = Enterprise Value less debt plus cash plus non-operating assets
Equity Value = MVIC less debt.

A valuation analyst will make an early key decision, can they go direct to equity value or must they calculate MVIC (or EV) first. If the financials suggest they can go direct to equity then they won’t bother calculating MVIC or EV. If they cannot go direct to equity then they have an extra step and calculate the weighted average cost of capital, the indirect method.