Both are helpful in evaluating a company’s financial health, however they offer different views of the business’s value. Understanding the difference between Market Caps and Enterprise Values will help you make educated buying decisions that align with investment goals.
Market Cap, also known as market capitalization is the total value of a company’s outstanding shares listed on the stock exchange. It does not include the company’s outstanding debt, which could result in a false impression of the value of the company. Enterprise Value, on the other hand is a method of adding the company’s debt to its equity, and subtracts its cash to provide a complete picture of a business’s worth.
A company’s debt can give you an idea of the firm’s financial obligations that have to be paid over time, and the ability of the company to invest in growth opportunities and pay dividends to shareholders. Additionally, subtracting the company’s cash reserves gives you an idea of its liquidity – the amount of cash available.
The EV/MarketCap ratio is an efficient and quick method to assess potential investments. However it’s not an alternative to due diligence or financial modeling. In addition, the EV to Market Cap ratio is not a reliable measure of a firm’s value against its peers, since it fails to take into dataroomtalk.info account differences in each firm’s unique capital structures and risk profiles.