While both are essential for assessing the financial health of a firm but they differ in their perception of the overall value of a business. Understanding the distinction between Market Caps and Enterprise Values can help you make informed buying decisions that are in line with investment goals.
Market Cap, also known as market capitalization is the value of the company’s outstanding shares listed on the stock exchange. It does not include a company’s outstanding debt, which can create a false VDR providers perception of the value of a company’s assets. Enterprise Value, however, adds the debt of a business to its equity and subtracts cash for an overall picture of its value.
By adding a company’s debt, it gives you an idea of the company’s financial obligations that need to be paid over time, as well as 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, which is the amount of cash in its bank.
The EV/MarketCap ratio provides a quick and easy way to evaluate potential investments. However, it does not replace due-diligence or financial modeling. Furthermore the EV to Market Cap ratio is not the most accurate measure of a company’s relative value against its peers, since it fails to take into account variations in the firm’s distinct capital structures and risk profiles.
