Market Cap Vs Enterprise Value

Both are helpful in evaluating a company’s financial health, but they provide different perspectives on the business’s value. Understanding the difference between Market Cap and Enterprise Value will help you make educated purchasing decisions that are in line with your investment goals.

Market Cap, or market capitalization is the value of a company’s outstanding shares listed on the stock exchange. It does not consider the company’s debt, therefore it may give a false sense of a firm’s overall worth. Enterprise Value is, on the other hand is a way to add the company’s debt to equity, and subtracts its cash to give a more complete picture of a company’s value.

Addition of a firm’s debt gives you an idea of the financial obligations it has to settle over time. It also gives you a better idea of the company’s ability to invest and pay dividends. Similarly, subtracting a company’s cash reserves gives you an idea of its liquidity, which is the amount of cash in its reserves.

The EV/Market Cap ratio can be a quick and easy way to evaluate potential investments. However, it does not replace due diligence or financial modeling. In addition, the EV to Market Cap ratio is not an appropriate measure of a firm’s value in comparison to its peers, because it does not take into account differences in each firm’s unique capital structures and risk profiles.