To be able to determine the value of a business, that business needs to be based on enterprise value and equity value. Each of those values will represent many other aspects when valuing the business. So, what are the outstanding characteristics of enterprise value and equity value? Let’s find out through the article below.
What is Enterprise value?
Enterprise value can be understood as the financial expression of the total income of investors received from the business activities of the enterprise. Enterprise value is not merely the equity value of a business, but the total value of all tangible and intangible assets used in the course of that business. for the benefit of credit holders and providers.
Thus, equity value is only part of the enterprise value. Enterprise value can be understood through the following formula:
Value of Equity = Enterprise Value – Value of Liabilities
The value that a business brings to investors can be viewed from two angles: Liquidation value and going concern value. In there:
- Liquidation value is the full amount generated when the business ceases operations and sells all of its assets.
- The Going-Concern Value is the present value of the future cash flows generated from the business of an enterprise…
However, the business can generate income or not and the magnitude of the income depends on factors such as assets, business reputation, management level,… and adaptability of the business to environmental factors.
So as to recognize the business value, the valuation effects of the valuation businesses need to have high accuracy and reliability, within the technique of determining the commercial enterprise price, except absolutely complying with the valuation concepts. The appraiser ought to pay attention to the elements affecting the price of the agency.
Every sort of enterprise has its personal characteristics, so while considering the elements that affect the price of the commercial enterprise, the appraiser additionally desires to take note of this specific aspect.
What is Equity value?
Equity is capital owned by business owners or joint venture members, shareholders of the company. The members contribute capital and build resources to put the business into operation. The capital contributors will share the profits or jointly bear the losses from the company’s production and business activities.
Owners are the permanent and permanent source of funding for the business. During the operation, equity will be supplemented from many different sources such as: Business profit, asset value difference, the stock price difference, etc. In case, the company operates, the unit must pay debts to creditors and wages to employees first, then divide them among members according to the capital contribution ratio.
Owners are an important component in the capital structure, affecting the development of the business. Understanding equity will help build an efficient optimal capital and resource structure
Therefore, with the concept of charter capital, the concept of equity seems to be less well-known. Owner’s name is an accounting concept, used in the balance sheet. Owner’s equity has a broader scope than charter capital, it includes the following components:
- Authorized capital;
- Share capital surplus (for joint stock companies);
- Treasury shares (for joint stock companies);
- Undistributed profits;
- Reserve funds;
- Other items of equity.
The value of equity proprietors is calculated as the whole fee of the employer’s property minus the full cost of the business enterprise’s liability. normally, the fee of the owner’s fairness is normally extra than the fee of the charter capital unless different objects within the owner’s equity are negative. for holding stocks and stocks, those are two concepts that observe to joint inventory corporations, no longer to restrained liability agencies.
The formula for calculating ownership will be determined as follows:
Equity = Total assets of the business – Total liabilities.
Example: Enterprise A was established with a total enterprise asset value of USD 100 million but has a bank loan of USD 50 million for production. Thus, the actual equity of business A is $50 million.
So, what are the similarities and differences between enterprise value and equity value?
Similarities
- Both are methods of valuing the total value of a business
- They are also used to compare the value of businesses operating in the same field.
Differences
- Enterprise value is the total value of the business, which includes both debt and equity.
- Enterprise value is a measure to compare the value of businesses of different sizes or businesses operating in different fields.
- Equity value can only represent the amount of capital available to the shareholders, not including liabilities or any other amount.
- Equity value indicates market demand.
- Enterprise value is a measure of the assets and liabilities of a business.
What factors should be considered when valuing a business?
Equity price and enterprise fee are each essential metrics for evaluating a business. In order for the enterprise valuation method to go easily in addition to so that it will make informed decisions, we want to pay attention to the subsequent factors:
- Capital structure
- Cash and cash equivalents
- Preferred shares
- Minority interests
- Market volatility, investor sentiment
- What is the purpose of the valuation?
In brief, financial analysts, monetary professionals or investors who need to value an enterprise require them to have a deep understanding of the fee of the enterprise and the value of equity.
By: Bank Info
