Discover our latest article on Enterprise Value, a key concept in the management of our funds BDL Rempart, BDL Convictions and BDL Transitions.
The value of a company on the stock market is often confused with its market capitalisation. However, these two concepts are very different, and it is important to understand how to distinguish them.
Enterprise value includes all of the following elements: market capitalisation, net debt, the value of minority interests, other liabilities, and the value of equity investments.
Let’s take company A, which has 100 shares and a share price of €10. Its market capitalisation is therefore €1000. Let’s walk through the step-by-step process for calculating the Enterprise value.
Calculating net debt
The company has €200 in cash and €500 in debt.
Net debt = Debt – Cash
Net debt = 500 – 200 = €300
Calculating minority interests
Very often, a company does not own 100% of its subsidiaries. If it owns only 90%, the remaining 10% is held by minority shareholders. Their stake must be valued and taken into account when calculating the Enterprise value. Let us assume that:
Value of minority interests = €20
Calculating other liabilities
The company often has other obligations to meet. These can include leases (e.g. €100), long-term provisions (e.g. €50), or pension liabilities (e.g. €50). All of these liabilities must be taken into account.
Other liabilities = €100 + €50 + €50 = €200
At this stage, the Enterprise value is 1000 + 300 + 20 + 200 = €1520
Calculating equity investments
The company may sometimes have minority investments (e.g. €10) in other companies that could be sold. Let us assume that:
Value of shareholdings = €10
Adding together the figures obtained at each step gives:
Enterprise Value = 1000 + 300 + 20 + 200 – 10 = €1510
We can see that the value of company A’s enterprise value is very different from its market capitalisation: it is 60% higher.
Now, imagine Company B, identical to Company A. It also has a market capitalisation of €1000. However, it has no debt, no minority interests, no other liabilities and no equity investments. In this case, therefore, its enterprise value is equal to its market capitalisation, i.e. €1000.
Conclusion
Enterprise value takes into account all parties with a financial interest in the company, whereas market capitalisation represents only the shareholders.
