How is equity value calculated?

Equity value is calculated by subtracting total debt from enterprise value. This reflects the portion of the company's value that is attributable to its shareholders after accounting for its obligations to debtholders.

Enterprise value represents the total value of a business, including both equity and debt, and is often viewed as the theoretical takeover price of a company. To focus solely on the equity portion that belongs to shareholders, total debt is deducted from the enterprise value. This leaves the value of equity available to shareholders, providing a clear picture of the ownership stake's worth.

While other methods, such as multiplying shares outstanding by share price, may offer insights into market capitalization, they do not consider the overall capital structure of the company. Therefore, understanding the relationship between equity value, enterprise value, and total liabilities is crucial for accurately assessing a company's valuation.