Enterprise Value Vs Market Cap
Market cap is an important measure however, it does have some limitations when it comes to determining the size and worth of a business. In contrast, enterprise value is a more holistic measure of the value of a business that considers all aspects of a firm’s capital structure, which includes debt and cash.
The formula used to calculate a company’s Enterprise Value is as simple as and includes: the current price of shareholders (market capitalization) plus the total of short and long-term loans as well as preferred stock and minorities together with cash and cash-equivalents. Enterprise value is used to evaluate companies operating in the same field. It is also a major factor in determining valuation multipliers such as EV/EBITDA or EV/Sales.
Large corporations and investors looking to acquire a business rely on EV because it offers a precise, theoretical calculation of a company’s worth in the market. It also has some key differences from market cap, for instance, it isn’t dependent on fluctuations in trading trends.
While market cap is often used to classify businesses into categories such as large-caps and mid-caps as well as small-caps however it’s not the same for EV. However, both can provide valuable information to entrepreneurs and investors in assessing the potential of a business to expand its market share. Enterprise value can ultimately help investors identify risks such as debt versus cash available. It also reveals the capacity of a business to earn profits in relation to its capital. This is especially important for companies that have a large amount of debt in comparison to equity.