The Daily Technical #50: How are the three financial statements connected?

Good morning. Welcome to the 50th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What is the difference between enterprise value and equity value?

Enterprise value represents the total value of a business to all stakeholders, including equity shareholders, debt holders, and preferred stockholders. It reflects the entire capital structure and operating assets of the company.

Equity value represents only the value available to common shareholders, essentially what shareholders would receive if they sold all their shares at the current market price.

Key differences:

• Enterprise value = Equity value + Total debt - Cash and cash equivalents + Preferred stock

• Enterprise value is capital structure neutral, making it better for comparing companies with different debt levels

• Enterprise value more accurately reflects acquisition cost since a buyer would assume both assets and liabilities

• Equity value fluctuates more with changes in debt levels or cash positions

• Enterprise value is preferred for operational analysis (e.g., EV/EBITDA), while equity value is used for shareholder metrics (e.g., P/E ratio)

Common Mistakes

1. Ignoring Debt and Non-Equity Stakeholders: Enterprise value includes debt and other forms of capital beyond just equity. Always factor in these components for accuracy.

TL;DR

• Enterprise value represents the entire business's worth to all stakeholders (equity holders, debt holders, preferred), while equity value only represents what's available to shareholders.

• Enterprise Value = Equity Value + Debt - Cash + Preferred

TODAY’S QUESTION
How are the three financial statements connected?

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