More like an art rather than a science, there are so many ways in estimating a company’s valuation. As a follow-up to the Intrinsic Value blog post, I am going to explore the difference between Book Value and Enterprise Value.
Book Value
Book value represents the total amount a company is worth if all its assets are sold and all the liabilities are paid back. This is the amount that the company’s creditors and investors can expect to receive if the company is liquidated. The formula is Total Assets less Total Liabilities
Enterprise Value
Enterprise value, or EV, is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. EV includes in its calculation the market capitalization of a company but also short-term and long-term debt as well as any cash on the company’s balance sheet. Enterprise value is a popular metric used to value a company for a potential takeover. The formula is Market Capitalization plus Debt less Cash
So when do I use Book vs Enterprise values
As you can see in my formula for Intrinsic Value, I add the future discounted cash flows to the current book value of a company. Regarding EV, it helps me understand what the current market expectations of the company. This is the company’s potential future cash flows and the premium placed above book value. Let’s look at the calculations:
Apple Book value as of Mar 20, 2020 is $78.4 Billion
Apple EV as of July 20, 2020 is ~$1.62 Trillion
EV to Book multiple is 20.7x for the future cash flows and premium for APPL equity.
In summary, as a true value investor at heart, book value will be the basis of many analysis in assessing a good deal on equity value of a company.
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