What Affects Enterprise Value?

What Affects Enterprise Value?

Published on Aug 16, 2016

You’ll learn what affects Enterprise Value, and what does not, in this tutorial – and why it’s far more accurate to say that *some changes* simply affect Enterprise Value by less than *other changes*.


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Table of Contents:

6:48 Excel Demonstration of Factors That Impact Enterprise Value

10:45 Recap and Summary

QUESTION: If raising additional debt or equity, repaying debt, repurchasing shares, issuing dividends, and so on, all do not affect Enterprise Value, what DOES affect a company’s Enterprise Value?

To answer this question, you have to go back to the definition of Enterprise Value: the value of a company’s core business operations to ALL the investors in the company

The second part is straightforward, but what does “the value of the core business operations” mean?

ANSWER: The sum of the Present Value of a company’s Unlevered Free Cash Flows, plus the Present Value of its Terminal Value.

So a discounted cash flow (DCF) analysis gives you a company’s *implied* Enterprise Value – what it should be worth if your assumptions are correct.

So if something affects the company’s Unlevered Free Cash Flows, its Terminal Value, or both, it will affect the company’s Enterprise
Value as well.

The most common factors that affect Enterprise Value are expectations of higher or lower revenue growth or higher or lower margins in the future.

Example 1: The company wins a major contract with a new customer.

Example 2: The company’s expansion strategy into Southeast Asia succeeds more quickly than expected.

Example 3: The company closes down an unprofitable division, boosting its margins.

Example 4: The company negotiates a better supplier contract, boosting its margins.

All these changes are operational in nature, affect the company’s core business, and change its future Unlevered Free Cash Flows, so they would also impact its Enterprise Value.

Other items, such as changes in expectations for Capital Expenditures, Working Capital, and non-cash adjustments such as D&A could also affect Enterprise Value…

BUT they will make a fairly small impact next to differences in revenue growth and operating margins.

These items also tend to stay in fairly narrow ranges, as percentages of revenue, over time, whereas revenue growth and operating margins can swing around wildly.

If you go into Excel and try changing different assumptions in a DCF, including the company’s targeted debt/capital or debt/equity ratio, you’ll see that revenue growth and margins affect Enterprise Value by far more than almost anything else.


So *in theory*, changes such as more or less debt or equity will not affect Enterprise Value – only operational changes such as expectations of higher/lower growth or margins will.

But *in reality*, capital structure changes will still affect Enterprise Value, but by FAR LESS than operational changes.

So you’ll see small changes in Enterprise Value when going from a 10% debt / total capital ratio to 20%…

…but you’ll see MUCH bigger changes if, say, future revenue growth goes from 10% to 20%.