Enterprise value

Enterprise value and equity value answer two different questions about the same company. Equity value — the market capitalisation — is the price of all the shares: what it costs to own the profits left after debts are serviced. Enterprise value is the price of the whole operating business: market capitalisation plus debt minus cash, what a buyer of the entire firm effectively pays once its obligations come with it and its cash comes off the bill.

A plain purchase makes the bridge visible. Consider buying a small company whose shares are worth 70 million in total, carrying 40 million of borrowings and holding 10 million of spare cash. The shares cost 70, but ownership brings the debt along, and the cash in the till reduces the true outlay the moment the keys change hands. The business itself — the thing that earns — was bought for 100: seventy for the equity, plus forty of assumed debt, less ten of inherited cash. That 100 is the enterprise value; the 70 is the equity value; the arithmetic between them is called the bridge.

The reason the distinction matters daily is the matching principle. Enterprise value belongs over profit streams that are shared by all providers of capital — operating income, EBITDA, revenue — because those streams pay lenders and shareholders alike. Equity value belongs over streams that arrive after interest — net earnings, free cash flow, book value. Crossing the wires is the most common error in amateur valuation: an after-interest earnings figure under an enterprise numerator flatters exactly the companies with the boldest borrowings, and the more leveraged the firm, the bigger the flattery.

The gap between the two values is itself information. An enterprise value far above the market capitalisation announces leverage: the equity is a thin slice atop a large obligation, and small changes in the worth of the business swing that slice violently in both directions. An enterprise value below the market capitalisation announces net cash — and occasionally a company trades below the cash it holds, meaning the market prices the operating business below zero. Graham hunted such cases professionally; the modern versions usually carry a reason — cash being burned, cash trapped abroad, or shareholders doubting it will ever be returned — and the discount is as much a judgement on governance as on assets.

The textbook bridge has fine print. Fuller versions add preferred stock and minority interests to the buyer's bill; debt is carried at its balance-sheet value, which can drift from what retiring it would cost; lease obligations now sit on the balance sheet and behave like debt; a pension deficit is a creditor in everything but name. And not all cash is spare — a retailer's tills and a manufacturer's working capital are part of the machine, not a rebate. The headline formula is a fast, honest approximation; a full appraisal reads the notes.

Two situations break the tool. For banks and insurers enterprise value is not meaningful at all: deposits and float are raw material rather than financing, so subtracting "debt" from "the business" dissolves the very distinction the measure depends on. And at cyclical peaks, enterprise multiples built on swollen operating profits can make the most dangerous companies look the cheapest — the denominator's honesty always limits the ratio's.

Moatkeep computes market capitalisation as the share price times shares outstanding, summed across share classes at each class's own price, and enterprise value as that figure plus total debt minus cash and equivalents from the latest filed balance sheet — refreshed as prices move, revised when filers restate, and stamped with the fiscal period of the balance-sheet inputs. The enterprise multiples on each company page are built from this same figure.

The habit the concept teaches is the buyer's habit. Buffett's counsel has always been to buy businesses, not tickers — and the price of a business is its enterprise value. Asking what the whole thing costs, and what the whole thing earns, is the discipline that keeps a cheap-looking share price from being mistaken for a cheap company.