Market Cap Vs Enterprise Value
While both are crucial for assessing the financial health of an organization however, they differ in their view of the overall value of a business. Understanding the distinction between Market Cap and Enterprise Value will help you make educated purchases that align with your investment goals.
Market Cap, or market capitalization, is the total value of the company’s outstanding shares listed on the stock exchange. It doesn’t consider the debt of a company, so it could give an inaccurate perception of the overall worth of a business. Enterprise Value, however, adds the company’s debt to its equity and subtracts cash to give an overall view of its value.
The addition of a company’s debt gives you an idea of the firm’s financial obligations, which must be paid over time, as well as its capacity to invest in growth opportunities and pay dividends to shareholders. By subtracting the money of a company, it gives you a sense of its liquidity, or the amount of cash it has available.
The EV to Market Cap ratio offers an easy method to screen companies for potential investments however, it cannot substitute due diligence or financial modeling. Additionally the EV to Market Cap ratio is not the most accurate measure of a company’s value relative against its peers, since it fails to account for variations in the firm’s distinct capital structures and risk profiles.