So when we talk about equity vs enterprise value, we say equity value pertains to what’s only available to EQUITY investors within a firm. I know this but how can I think about this conceptual? Also when we compare enterprise value to equity value in terms of what changes are made, we say Enterprise is core business only but equity value is both core and non core. Why? To get from equity value to enterprise value, you’re adding in many components so shouldn’t it be the other way around ?
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Enterprise value stands for overall value of the company to both debt as well as equity holders (preferred as well as common shareholders). What you need to know is that if you and I provide cash for equity to a business, we become part-owners (equity holders) just like the lenders who provide loans (debt) and hence require principal and interest payments. Equity value refers to the market cap of a business (share price times the total outstanding shares) on a high level basis. This means that it removes the debt value of the business from the Enterprise Value to only show you what the business is worth to equity holders alone. There are other pieces that go into calculating enterprise value like adding preferred shares and minority interests and subtracting cash (which is already accounted for in the equity value calcuation) - meaning that enterpride value is usually bigger than equity value. I'm not sure I quite understand what you mean by core and noncore business so I'm going to leave that for other people well-versed on the subject matter to chime in. Check out this page for more info - https://www.investopedia.com/ask/answers/111414/what-difference-between…
Think of it this way: Any business is worth the present value of all future cash flows that can go to its capital providers (debt and equity). So, that number is the Enterprise Value. Then you say, how much of that EV is owed to the creditors? For simplicity's sake, that figure is the debt on the balance sheet. So, what's left over after you take EV minus debt is the present value of all future cash flows that can go to its equity investors.
The analogy I like to use here is a wallet. The wallet contains some cash and some IOUs. When talking about the value of the wallet, we want to distinguish between the value of the wallet itself (Enterprise Value) and the how much owning the wallet and its contents is worth to its owner (Equity Value).
Obviously the amount of cash and IOUs inside the wallet doesn't affect the intrinsic value of the wallet itself. A $10 wallet filled with hundred dollar bills is still a cheap wallet, but the value of owning it is worth a lot more.
If the owner wanted to sell the wallet, he could always choose to empty it first and take his cash/IOUs with him.
Thank you! This is helpful
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