In business finance, two fundamental concepts for investors evaluate business are equity and valuation . Equity refers to the net equity of a company-in simple terms, it is the part that effectively belongs to the partners, after deducting all debts. Valuation corresponds to the total economic value of a company, ie an estimate of how much the entire business is worth considering its potential for future gains. Although related, Equity and Valuation are not the same thing. In this didactic article, we will clearly explain what equity is, how to calculate it, in which it differs from valuation, and as factors such as the brand and other intangible assets influence the perceived value of the company . We also bring practical examples (such as high valuation and low equity startups investors analyze equity versus valuation when deciding their contributions.
What is equity and how is calculated?
Equity is basically the corporate participation or equity of a company. It is the portion of the value of the business that belongs to the owners (shareholders), after all obligations and debts were subtracted from the assets. A simple way to understand: Think of equity as your own slice in business, your “piece of cake” after paying debts . In the balance sheet , this translates into the formula:
- Equity = total assets - total liabilities.
In other words, if the company sold all assets and paid all debts today, what was left would be the equity, representing the accounting value that actually belongs to the partners. Therefore, equity is also known as equity. This metric reflects the current financial health of the business - a positive and growing shareholders' equity usually indicates that the company has accumulated resources and wealth over time, while a negative equity means that liabilities surpass assets (a worrying situation).
To calculate the equity of a company, the balance sheet data is used. Added to the value of all assets (circulating and non-circulating) and subtract all liabilities (circulating and long term). The result is equity. For example, imagine that a company has total assets of $ 100 million and passive of $ 70 million ; Its equity (equity) would be $ 30 million . This simple account depends on the quality of accounting information, but gives an immediate view of the accounting value of the business. In short, the higher the equity, the greater the base value of the company , as there are the more their own resources supporting the operations. However, as we will see later, equity alone does not tell the whole story about the value of a company.
Difference between Equity and Valuation
Although related, equity and valuation are different concepts. Equity is a present accounting value , a kind of financial photography of the company at a given moment - it shows what the company is worth today in terms of accumulated heritage. Valuation is a market value estimate , usually designed for the future - it is like a film that considers the company's growth potential, its future profitability and other external factors.
While equity represents the current property (equity) of shareholders, valuation is the process of determining how much the business is worth a whole . It's like giving the whole cake a price and not just current ingredients , considering future recipes, expected growth, risks and opportunities. Valuation is obtained through financial methodologies (discounted cash flow, market multiples, comparable, etc.) and incorporates multiple factors beyond the balance . In short, equity focuses on the present and past (data already performed), while valuation focuses on the future and value generation potential.
This difference means that a company can have a very different equity value from its valuation. For example, it is possible for a company to have negative equity (more debts than active today), but still have a positive valuation if it has great future growth potential . This is often the case with startups in early stages: even operating in red or with modest equity, they can achieve high valuations based on growth expectations, innovative technology or other differentials. Valuation is a projection and vision exercise , not just accounting, while equity is an accounted for what has been built so far.
Another way to understand the relationship is: Valuation directly influences each shareholder's equity value . If the valuation of a company rises, the equity of each partner becomes more valuable in the market. However, a high valuation does not change equity accounting instantly - it reflects a market assessment. Therefore, it should not be confused with equity (valuation) , as the latter considers multiple factors and future projections that go beyond what is in accounting books.
Equity and the perceived value of the company
Equity impacts the company's perceived value , but it is not the only determinant in valuation. In consolidated companies and traditional sectors, there is usually a closer relationship between equity and market value - investors often look at indicators such as price/patrimonial value (p/VP) to assess whether an action is expensive or cheap in relation to what the company actually has. For example, the P/VP indicator compares the market value (price of action times number of shares) with accounting equity; If an action negotiates below its equity value (p/VP less than 1), it may indicate that the market evaluates the company for less than its net assets would be worth, suggesting potential discount (or eventually problems not reflected in the balance). On the other hand, companies with P/VP well above 1 are evaluated by the market far beyond their assets, which usually means that their intangible assets or future profit prospects are highly valued by investors .
In short, a robust equity tends to increase a company's valuation floor as it indicates financial solidity. Banks, for example, need to have strong equity to gain market confidence. Already a company with low equity (or deteriorated by loss) can have its market value penalized - classic case of companies in crisis, whose stock price falls and is worth less than net equity, for lack of confidence in its profitability. Investors carefully analyze the quality of equity : not just the value itself, but its composition (but it is capital vs. debt), the trend (increasing or decreasing equity over the years) and the profitability generated on this heritage (indicators such as ROE - return on equity ). A high ROE suggests that the company can generate significant profit from its assets, which usually raises valuation. Already a low or negative ROE points to inefficiency or problems, potentially reducing the perceived value.
However, it is possible for the market to assign a high valuation to companies whose accounting equity is low . This happens especially when other factors come into play - and that's where intangible assets and growth expectation come in. Next, we explore as elements such as brand , technology, and other intangibles can make Valuation much over the accounting value.
The role of brand and intangible assets in valuation
One of the reasons why a company's valuation can overcome its equity is the value of intangible assets . Intangible actives are non -physical resources - for example, brand , patents , software , intellectual capital , customer base and proprietary technology These items often do not appear fully accounted for in the balance sheet (unless they have been purchased from third parties), but have enormous economic value. In the modern economy, intangible actives have become the main engine generation engines . To get an idea, it is estimated that by 2020 intangibles represented about 90% of the market value of the S&P 500 index companies (the 500 largest US companies), while in 1975 this percentage was only 17%. This illustrates as intangible factors today weigh much more in valuation than physical and tangible actives.
A strong brand , for example, adds value by allowing the company to practice premium prices and have greater customer loyalty . This means better profit margins and more predictable revenues, elements that increase the present value of future cash flows and therefore raise valuation .
Accounting, if these assets are not registered (or underestimated) in the balance, the accounting equity is below the “real value” of the business. Therefore, when evaluating companies, investors look beyond net equity: they consider future performance indicators. Valuation methods such as discounted cash flow (FCD) serves precisely to capture the value of intangible assets within the financial projection. This method brings at present value all the cash flows that the company can generate in the future, more faithfully showing the impact of advantages such as brand, technology and customer base on cash generation.
In innovative or technology companies, it is common for valuation to be much higher than equity precisely because of these intangibles. Think of technology giants or platform startups: Much of the value comes from things as a global brand, millions of users, accumulated data and intellectual property - factors that do not appear fully in the PL , but which investors “precet” by determining the market value. A valuable brand and strong active actives make investors to pay much more than the accounting amount of tangible assets , because they expect extraordinary future gains from these competitive differentials.
Practical Examples: High Valuation Startups Low Equity
To illustrate, let's look at market examples - especially startups - where valuation reaches high figures while equity is still reduced. Growth startups often operate with damage in the early years , consuming capital to gain market, which keeps its equity low or even negative. Still, they can reach billionaire valuations due to the expectation of future dominance in the market and the value of their intangible assets (innovative technology, emerging brand, user base).
Nubank (famous for its purple card ) is an example of a Brazilian startup that reached billionaire valuation even operating with losses in the early years. In 2019, Nubank - the main card of cards and digital bank of Brazil - had never made a profit since its foundation , accumulating losses of about R $ 380 million in the first five years. Still, large investment funds landed heavy capital in the company (over US $ 700 million so far) and in the last round of investment before IPO attributed to Nubank a valuation of nearly $ 3.9 billion (about $ 15 billion) . That is, despite the modest equity (basically formed by the contributions received less the accumulated losses), the valuation already reached tens of times this value. Why? Investors were not looking at the current profit (nonexistent at the time) , but to other metrics and perspectives: explosive growth of clients (millions of purple card users), traditional banking disruption The big bet was that Nubank would lead a transformation in the Brazilian financial market and eventually become very profitable. In fact, years later, in 2021/2022, Nubank opened capital with a valuation that exceeded R $ 250 billion, exceeding the market value of traditional banks . even having incipient profitability. This case highlights as investors precede the future potential and intangible quality of the business (brand, technology, customer loyalty) far above current equity.
Nubank is not an isolated case. Several unicorns (startups valued at over $ 1 billion) followed this way. the “startups with valuations disproportionate to its cash generation was caught , true loss machines operating with very high market value. This disconnection tends to sound a warning: eventually, to support high valuations, the company will need to deliver compatible results. Otherwise, there may be drastic corrections in value. International examples such as Uber and Wework were famous for reaching stratospheric valuations despite successive losses - later facing questions and adjustments when investors began to demand clear paths for profitability.
On the other hand, there are companies whose valuation is less or close to equity - for example, mature companies from traditional or difficult sectors, where the market believes the business is worth a little more than its liquid assets. In these cases, few valuable intangibles or low growth perspective cause the price to be pulled down and may even be below equity (p/VP <1). This can signal opportunity (cheap actions in relation to accounting value) or simply reflect that the assets in the balance is overpowered and the company cannot generate proper return on them.
As investors analyze equity vs. Valuation when investing
investor 's point of view , understanding the relationship between Equity and Valuation is crucial to making good investment decisions. In business ratings (whether to buy stocks on the scholarship, or to invest in a startup), the investor wants to know how much it is paying for what the company really has (equity) and how much expects to earn with what the company can come to Valuation (Valuation) .
In the case of investments in startups or closed capital companies , investors look at which equity will obtain from the invested capital and whether the proposed valuation makes sense in the face of fundamentals. For example, if a startup calls for an investment that prices on $ 100 million valuation, but has a much lower equity (say $ 5 million) and little revenue, the investor will question where this value comes from - will usually be anchored in growth projections. Experienced investors carefully evaluate these projections and compare with current indicators to avoid paying too expensive for a slice of a company that may not deliver the expected growth. They also consider dilution : a higher valuation means that, by the same money invested, the investor has a smaller slice of equity; Therefore, it is in the entrepreneur's interest to negotiate a high valuation, while the investor wants a realistic valuation to give him significant participation for the risk he is assuming. Balance in these negotiations comes exactly from the critical analysis of equity vs. Valuation.
In investments in companies listed , Equity vs. Analysis. Valuation appears in indicators such as the already mentioned for VP (price/equity value) and other multiples. Value Investors investors , for example, seek companies whose quotation is attractive to their accounting value - an indication of possible undervaluation . On the other hand, growing companies often negotiate with multiples above the equity value, and investors agree to pay this prize if they believe in the growth of future profits. In both cases, the key is to understand the difference between the present value (equity/equity) and the future value (valuation) . As a valuation guide points out, "knowing the real value of a company (valuation) and what represents your equity allows you to identify the best opportunities and avoid financial traps . In other words, by mastering these concepts, the investor can decide with more basis if it is worth injecting capital into a business and when terms.
Also, understanding equity and valuation gives negotiation power . In a company sales or investment capture, knowing how to correctly calculate the equity and to support a valuation prevents the owner from accepting an offer below what the business is worth or, in the opposite case, covers an unrealistic price that fans investors. For investors, this clarity helps to negotiate stakes and fair prices , aligning return expectations. Startups that have a well -founded and transparent valuation are easier to attract capital, as they convey confidence that the numbers make sense (data indicates that light valuation startups capture investment 40% faster).
Finally, it is noteworthy that Equity and Valuation complement each other in the analysis. Equity shows where the company is today , and Valuation points out where it can arrive tomorrow . Smart investors look at both: check if the company has a solid base (assets, own resources, low leverage) and also if there are prospects for growth and strong intangibles that justify paying above this base value. This 360º Vision helps identify promising businesses as well as avoid investment pitfalls - for example, companies with high valuation “sold” on Hype, but without heritage substance or real cash capacity. As a synthesis, Equity is the anchor of the company's current financial reality, and Valuation is the balloon of future expectations - the investor's work is to check if the balloon is not too full to the point of disconnecting from the anchor. Balancing these aspects, the chances of making safer and more profitable investment decisions increases.
Equity and Valuation are two sides of the same coin
Equity and Valuation are two sides of the same coin when it comes to evaluating companies, but each brings a different perspective. Equity reveals the intrinsic value built so far - equity, what partners actually have today . Valuation reflects the price that the market attributes to the business , looking forward - what investors believe that the company will be worth , given its potential, brand, intangible assets and market context. For investors , understanding both concepts is essential: allows you to value companies more completely, identify hidden opportunities (and risks) and negotiate better agreements. For entrepreneurs , it means to better structure investment rounds, avoiding excessively diluting your participation and knowing how to justify the value of your business with data and projections.
In short, equity is foundation, valuation is the perspective . Knowing how to balance the analysis between what the company has and what it can generate is the key to smart decisions. As we have seen, a strong brand and other intangibles can leverage valuation far beyond net equity, and examples of startups show that the market often pays for the future more than for the present. However, in the long run, it will be the convergence of these two elements - growing assets and expectations - that will determine the success of an investment. So whether you are an investor or entrepreneur, keep your feet on the ground with the equity numbers, but without taking your eyes off the horizon designed by Valuation. This will give you a complete strategic vision of the company's value in all its dimensions.
References: Understanding these concepts is based on analysis of experts and reliable sources of the market. Studies show the importance of intangible assets (as a brand) in the value of modern companies. Financial guides highlight the difference between equity and market value, explaining that equity is equivalent to accounting value , while valuation is a broad estimate of the economic value of the business. In practice, Brazilian startups illustrate this dynamic - cases such as Nubank show bilium -sustained valuations supported in potential growth, even with low initial equity. balance data cash flow projections to pricing companies fairly, using metrics such as P/VP to mark their decisions. Thus, Equity and Valuation, although different, walk together in assessing the value of a company, providing a comprehensive view for intelligent investment decisions Generate wealth in the future, something that goes far beyond the nominal value of social capital.
