Enterprise Value, Multiples, and Comparable Companies

Two companies earn the same $100 million of EBITDA, yet one is "worth" twice the other. The gap lives in capital structure, growth, and risk. Enterprise value and trading multiples are the tools that translate those differences into a single comparable price.

Start with the distinction. Equity value (often called market capitalization) is what the common shareholders own. It equals the share price times fully diluted shares outstanding. Enterprise value (EV) is the value of the entire operating business, regardless of who financed it: lenders, preferred holders, minority partners, or common shareholders.

To get from one to the other, build the bridge. Add every non-common claim on the business, then subtract cash, because cash is a non-operating asset an acquirer could use to pay down the purchase.

$$\text{EV} = \text{Market Cap} + \text{Debt} + \text{Preferred} + \text{Minority Interest} - \text{Cash}$$

Each piece has a reason. Total debt is added because debtholders have a claim on the business an acquirer must assume or repay.

Common mistakes

• Pairing the wrong metric with EV. EV/net income and price/EBITDA are both invalid. EV pairs with pre-interest figures (EBITDA, EBIT, sales); price pairs with after-interest figures (net income, book value).
• Forgetting to subtract cash in the EV bridge. Cash is subtracted, not added. Adding it inflates EV and every EV multiple.
• Stopping at implied EV. An EV multiple gives implied enterprise value, not equity value. You must subtract debt and preferred and add cash to reach price per share.

Bottom line

• Enterprise value = market cap + total debt + preferred + minority interest − cash and equivalents; it is the value of the whole operating business, capital-structure neutral
• EV pairs with pre-interest, whole-firm denominators (EBITDA, EBIT, sales); equity value (price) pairs with after-interest, per-share denominators (net income, book value, equity cash flow)
• Common EV multiples: EV/EBITDA, adjusted EV/EBITDA, EV/sales
• Common equity multiples: P/E (LTM and forward), price-to-book (stated and tangible), price-to-sales, PEG, price-to-cash-flow, price/NAV

Exam shortcut

Bridge direction: going up to EV, add debt, preferred, and minority interest, then subtract cash. To get back to equity, reverse every sign. An EV multiple always lands on EV first, so reverse the bridge before quoting a share price. Layer test for any multiple: if the denominator is above interest on the income statement (EBITDA, EBIT, sales), use EV.

The full lesson (about 2,867 words, 19 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.

Learning objectives

• A5
• A6

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