Market Cap Vs Enterprise Value

Both measures are useful in assessing a company’s financial health, but they offer different perspectives regarding the company’s value. Understanding the distinction between Market Cap and Enterprise Value will help you make educated procurement decisions that align with your investment goals.

Market capitalization is the total value the company has in its outstanding shares listed on the market. It doesn’t take into account the company’s debt, and therefore it could give an inaccurate picture of a firm’s overall worth. Enterprise Value is, on the other hand is a method of adding a company’s debt to its equity, and subtracts it from its cash to provide a more complete image of the value of a company.

Adding a company’s debt gives you an idea of the company’s financial obligations that must be paid over time, as well as the ability of the company to invest in growth opportunities and pay dividends to shareholders. In the same way, subtracting a company’s cash will give you an idea of its liquidity – the amount of cash it has in its reserves.

The EV/MarketCap ratio provides a quick and easy way to evaluate potential investments. However it is not a substitute for due-diligence or financial modeling. The EV to market cap ratio is also not a reliable measure of a firm’s relative worth to its peers because it doesn’t consider the different features in the structure of capital and risk profiles.

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