Enterprise Value Vs Market Cap
Market cap is a valuable measure, but it has many limitations in determining the worth and size of a company. In contrast, enterprise value is a more holistic measure of the worth of a firm that takes into account the entirety of a company’s capital structure, including debt as well as cash.
The formula used to calculate a company’s enterprise value is as simple as the current price of the shareholder (market cap) plus the total of long- and short-term debt plus the sum of all preferred stock and minority interest, plus cash and cash equivalents. Enterprise value is used to evaluate companies in the same industry. It is also a key factor in determining valuation multiples such as EV/EBITDA or EV/Sales.
Businesses and investors who are looking to buy a company rely on the EV as it offers an extensive theoretical analysis of its market value. It also has a few key distinctions from market cap such as the fact that it isn’t subject to changes in the direction of trading.
Market cap is commonly used to categorize companies into brackets such as VDR providers large-caps, mid-caps, and small-caps however EBIT isn’t. Both can be valuable for entrepreneurs and investors when evaluating the company’s potential to expand in the market. Enterprise value will ultimately help investors identify risks such as debt in relation to the cash available. It can also provide insight into a company’s ability to generate income in relation to capital available. This is especially crucial for companies with large amounts of debt in comparison to equity.