Equity Value Versus Invested Capital

Value can be considered on three levels:

  1. The value of the enterprise before taking into account its cash and debt
  2. The market value of invested capital (MVIC), which is equal to enterprise value plus cash
  3. Equity value, which is MVIC less debt.

An example illustrates the differences. Suppose an acquirer agrees to buy the stock of a company for $1 million, and the company has $2 million in debt. Will the buyer assume the debt or not? In this example, the value of the equity is $1 million, and the MVIC is $3 million.

Now suppose the company has $500,000 in cash. Will the seller transfer the cash to the buyer? The enterprise value is $2.5 million, which is the MVIC less the cash.

These distinctions can be important when considered public company multiples. A price/earnings (PE) multiple is a multiple of the company’s net income. It provides an indicator of the value of equity because net income has been reduced by interest expenses or increased by interest income. A multiple of earnings before interest expense (EBIT or EBITDA) is an indicator of MVIC.

Topic Library

Valuing Common Shares in Venture-Backed Companies

Venture Capital backed companies issuing common stock options need to be aware of the valuation methods discussed here.

Preferred Terms and Their Impact on Common Stock Value

A discussion of the rights preferred share holders typically enjoy in Venture Capital backed companies.

Approaches to Valuation

The three most common approaches to valuing businesses—market, income, and asset-based—are discussed.

Fair Value Versus Fair Market Value

Tax and accounting standards rely on different definitions of value. When presenting an opinion of a business' value, it is important to know which body of knowledge applies.

Equity Value Versus Invested Capital

A discussion of the difference between enterprise value (what’s the value of my business?) and equity value (what’s the value of my stock?).

What is the appropriate common stock discount for lack of marketability?

Valuations of privately-held common stock often include a discount for lack of marketability. Selecting the appropriate discount is a matter of judgment & expertise and those issues are discussed here.