1. Advantages and Disadvantages of Enterprise and Equity Value
Now, let's talk about some of the advantages and disadvantages of enterprise
value versus equity value. Some advantages of enterprise value,
enterprise value is the value of a company's operations,
since enterprise value is capital structure and neutral, as we discussed
in the house example, it's more useful when comparing companies with different
capital structures. Enterprise value multiples minimize accounting policies
relative to net income and earnings per share.
But there are also disadvantages to using enterprise value.
While this course focuses on debt and cash with regards to calculating enterprise
value, there are other debt and cash like items that may be hard
to measure, for example, companies may make investments in other companies
that may be difficult to value. We discuss this more in the Comparable
Valuation Analysis course. Enterprise value is also a little less useful
for analyzing stocks, since enterprise value is the value of the business
not the equity value. Some of the advantages of equity value,
equity value is obviously more relevant to equity valuation,
which is just a portion of a business.
Equity value also requires less judgment than enterprise value, again,
where there are some debate around what constitutes debt and what is considered
cash. Disadvantages of equity value include the following,
equity multiples rely heavily on net income or earnings per share.
However, net income is influenced by a company's accounting policies and
can also be manipulated. Additionally, net income is more likely to be negative
than, say, EBITDA, and multiples can't be used if earnings are negative.
Different capital structures will also impact earnings, even if the businesses
are identical in every other way. Now that you understand the differences
between enterprise value and equity value, let's begin looking at our three
main valuation techniques, starting with discounted cash flow valuation.
2. Let's practice!
Now, let's talk about some of the advantages and disadvantages of enterprise
value versus equity value. Some advantages of enterprise value,
enterprise value is the value of a company's operations,
since enterprise value is capital structure and neutral, as we discussed
in the house example, it's more useful when comparing companies with different
capital structures. Enterprise value multiples minimize accounting policies
relative to net income and earnings per share.
But there are also disadvantages to using enterprise value.
While this course focuses on debt and cash with regards to calculating enterprise
value, there are other debt and cash like items that may be hard
to measure, for example, companies may make investments in other companies
that may be difficult to value. We discuss this more in the Comparable
Valuation Analysis course. Enterprise value is also a little less useful
for analyzing stocks, since enterprise value is the value of the business
not the equity value. Some of the advantages of equity value,
equity value is obviously more relevant to equity valuation,
which is just a portion of a business.
Equity value also requires less judgment than enterprise value, again,
where there are some debate around what constitutes debt and what is considered
cash. Disadvantages of equity value include the following,
equity multiples rely heavily on net income or earnings per share.
However, net income is influenced by a company's accounting policies and
can also be manipulated. Additionally, net income is more likely to be negative
than, say, EBITDA, and multiples can't be used if earnings are negative.
Different capital structures will also impact earnings, even if the businesses
are identical in every other way. Now that you understand the differences
between enterprise value and equity value, let's begin looking at our three
main valuation techniques, starting with discounted cash flow valuation.