Market Cap Vs Enterprise Value

While both are crucial for assessing the financial health of an organization, they differ in their view of the overall value of a business. Understanding the difference between Market Caps and Enterprise Values will help you make educated purchasing decisions that align with your investment goals.

Market capitalization is the sum of value an organization has in its outstanding shares listed on the market. It does not include a company’s outstanding debt, which can cause a false impression of the value of a company’s assets. Enterprise Value, on the other hand, adds the company’s debt to its equity, and subtracts its cash to provide a complete picture of a business’s worth.

The addition of a company’s debt gives you an idea of the firm’s financial obligations, which must be paid over time, and its ability to invest in growth opportunities and pay dividends to shareholders. Also, subtracting a company’s cash gives you an idea of its liquidity – the amount of cash in its bank.

The EV to Market Cap ratio offers an easy method to screen companies for investment potential however, it cannot substitute due diligence or financial modeling. In addition the EV to Market Cap ratio is not an appropriate measure of a company’s value relative in comparison to its peers, because it fails to account for the different characteristics of each firm’s capital structures and risk profiles.

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