Those who have studied valuation formally before will recognise the similarity between debt free cash free and another term used in finance: “enterprise value”. Both measures value the company including certain of its liabilities. This makes the two measures of company value very similar. The difference is that some valuation practitioners would involve a few more liabilities in their calculation of enterprise value. For example, items that may not bear interest but still have to financed, such as a pension liability. This makes the two concepts very similar. DFCF includes debts. Enterprise value includes debt and debt-like items.
Valuation course summary: DFCF and enterprise value
To summarise, debt free cash free valuation:
- Represents the valuation of a company with net debt removed;
- Is greater than the shares/ equity value for a company that has net debt (remember the 100 million DFCF against the 70 million shares value);
- Is often used in letters offering to buy a company; and
- Is very similar to another term used in valuation: “enterprise value”.
Valuation course quiz
Proceed to the valuation course quiz.