Shares/ equity valuation vs. debt free cash free

How does debt free cash free valuation compare to shares or equity value? Let’s imagine a company that has shares/ equity with a valuation of 70 million. You can see that 70 million on the right hand side of the chart below. Let’s imagine that same company had debt less cash (= net debt) of 30 million. The debt free cash free valuation would be 100 million. That’s the value on the left hand side.

Equity valuation vs. DFCF

Image of a debt free cash free chart

Equity valuations are usually higher than DFCF values

For a company that has net debt (that is, where debt is greater than cash) the debt free cash free value is higher than the shares/ equity valuation for the business. You can see that in the chart above: the 100 million on the left is higher than the 70 million on the right. Working from left to right, if the owner of a company had received a debt free cash free offer of 100 million, and if net debt was 30 million, the owner would expect to receive 70 million for the shares/ equity in the business.

Continue with the valuation course

Next the valuation course considers why DFCF is used in business valuation.