While both measures are important to assess the financial health of a company but they differ in their perception of the value of a company’s overall. Understanding the difference between Market Caps and Enterprise Values can help you make informed buying decisions that align with your investment goals.
Market Cap, or market capitalization is the value of the company’s outstanding shares listed on the stock exchange. It does not consider the debt of a company, so it can give an inaccurate impression of a firm’s overall worth. Enterprise Value however is a way to add a company’s debt to its equity, and subtracts it from its cash to provide a complete picture of a business’s worth.
Adding a company’s debt gives you an http://www.dataroomtalk.info/market-capitalization-vs-enterprise-value/ idea of the firm’s financial obligations, which must be paid over time, and its capacity 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 it has on hand.
The EV to Market Cap ratio is an easy method to screen companies for potential investments however it is not a way to replace due diligence or financial modeling. Additionally the EV to Market Cap ratio is not a reliable measure of a company’s worth against its peers, since it fails to account for the different characteristics of each firm’s capital structures and risk profiles.