Market Cap vs Enterprise Value

Difference Between Market Cap vs Enterprise Value

The following article provides an online on market cap vs enterprise value. Market cap and enterprise value are both measures of a company’s market value but are expressed in terms of different parameters. It is important to understand that the calculation of both these measures is not identical, and these terms can’t be used interchangeably. Nevertheless, both measures allow you to take a peek at the company’s overall value, which eventually can be used for comparison with similar companies.

What is Market Cap?

The term “market cap” is one of the simplest ways of understanding the market value or size of a company. This metric assesses the market value of a company only on the basis of its stock. As such, the calculation of a company’s market cap is a very task as it involves simply multiplying its current stock price per share and the total number of outstanding shares. For instance, a company with 1 million outstanding shares and a current stock price per share of $30 will eventually have a market cap of $30 million (= $30 * 1,000,000).

Market Cap = Current Stock Price Per Share * No. of Shares Outstanding.

Another major use of the market cap is that it is used to split companies into different categories on a basis, such as small-cap, mid-cap, and large-cap stocks. Such categorization is usually helpful in finding companies for peer comparison within the same industry as each category has some unique characteristics. For instance, company stocks in the large-cap section are usually considered less risky with lower growth potential, and the trend gradually alters in the cases of mid-cap and small-cap stocks.

What is Enterprise Value?

The term “enterprise value” refers to the alternative method of assessing market value, which is a more comprehensive approach. As such, most of the investors are inclined to use a company’s enterprise value for purchasing its shares. Calculation of enterprise value is slightly complex as compared to market cap, as it involves the summation of the market cap itself, total debt obligations and then subtracts the total cash on hand. Some of the companies prefer including factors such as preferred shares and minority interest in the calculation of enterprise value.

Enterprise Value = Market Cap + Market Value of Preferred Shares + Total Debt + Minority Interest – Total Cash & Cash Equivalents

The enterprise value of a company signifies a hypothetical purchase price. This method is predominantly used in the asset valuation for the buyer; eventually, the buyer would take up all the responsibilities for all of its existing debt obligations.

Head to Head Comparison between Market Cap vs Enterprise Value (Infographics)

Below are the top 4 differences between Market Cap vs Enterprise Value:

Key Differences between Market Cap vs Enterprise Value

Some of the key differences between market cap and enterprise value are:

1. The market cap valuation is entirely based on equity stock, while the valuation of enterprise value takes into account debt and cash alongside equity.
2. While enterprise value is predominantly used in multiples analysis (EV/EBITDA, EV/Sales, etc.), the market is rarely used for such analysis.
3. While market cap is used for categorizing companies into brackets of large-cap, mid-cap and small-cap, enterprise value has no such use.
4. Invariably, a company’s enterprise value is expected to be higher if it has a positive debt situation (debt higher than cash & cash equivalent). However, in the case of a net cash position (debt lower than cash & cash equivalent), the market cap is higher than the enterprise value.

Market Cap vs Enterprise Value Comparison Table

Let us discuss the top comparison between Market Cap vs Enterprise Value:

Area of Comparison	Market Cap	Enterprise Value
Meaning	It is basically the market value of all the outstanding shares.	It is the method of company valuation on the basis of both Debt and Equity.
Formula	Current share prices * Number of shares outstanding	Enterprise value = Market cap + Market value of preferred shares + Total debt + Minority interest – Total cash & cash equivalents
Major Uses	Investors and analysts use this metric to determine the cost of purchasing all the shares of a company, especially in the case of a merger & acquisition (M&A) transaction. It can be used to determine the various factors used in stock valuation. It represents the overall market value of a company’s stock. Usually, investors use market cap (large-cap, mid-cap, and small-cap) to make potential investment decisions. It can be used to identify peers operating within the same sector or industry.	This metric is also used by investors for analyzing the money required to purchase a company, and the valuation is based on its debt, equity and available cash in case of a merger & acquisition (M&A) transaction. It is used for comparative/multiple analysis of companies irrespective of their difference in the capital structure. Examples of multiples are EV/EBITDA, EV/EBIT, EV/Sales, etc. It represents the overall market value of a company.
Impact of Debt and Cash on Valuation	It is not impacted by the value of debt and cash.	Debt increases enterprise value, while cash brings down the value.

Conclusion

So, it can be clearly seen from the factors discussed above that both the financial metrics have different approaches for identifying the market value of any company. Market cap is one that investors use to find information pertaining to the company’s size, its value, and growth outlook solely based on its equity value. On the other hand, enterprise value is used by investors for measuring the company’s overall market value that incorporates the value of its equity, debt, and cash & cash equivalents. Although both the metrics are very useful in their own different way, the investors prefer the enterprise value over the market cap because of the fact that it helps in determining the company’s value more accurately and so the analysts are able to project the company’s future growth in a better way.

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