metrics explained

Market Capitalization vs Enterprise Value: What's the Difference?

When it comes to valuing a company, there are two key metrics that are often used: market capitalization and enterprise value. Both are important in different ways, and understanding the difference between the two is crucial for any investor.

What is Market Capitalization?

Market capitalization, or "market cap," is a measure of a company's value based on the current market price of its shares outstanding. It is calculated by multiplying the current share price by the number of shares outstanding.

What is Enterprise Value?

Enterprise value, or "EV," is a measure of a company's total value, including both equity and debt. It is calculated by adding the market value of all outstanding shares to the market value of all outstanding debt, and then subtracting the value of any cash and investments.

The Difference Between Market Cap and EV

The key difference between market capitalization and enterprise value is that market cap only includes the value of a company's equity, while EV includes both equity and debt.

Why Market Cap is Important

Market capitalization is a good measure of a company's value for a few reasons.

First, it is easy to calculate and understand. All you need is the current share price and the number of shares outstanding.

Second, market cap is a good measure of a company's size. All else being equal, a company with a higher market cap is usually a larger and more established company than one with a lower market cap.

Third, market cap is a good measure of a company's liquidity. All else being equal, a company with a higher market cap is usually more liquid than one with a lower market cap. This is because there are more buyers for a higher market cap company's shares, and vice versa.

Why Enterprise Value is Important

Enterprise value is a good measure of a company's value for a few reasons.

First, it takes into account both equity and debt. This is important because a company's debt can have a big impact on its value. For example, a company with a lot of debt may be worth less than a company with the same amount of equity but no debt.

Second, enterprise value is a good measure of a company's true size. This is because it includes both equity and debt. So, all else being equal, a company with a higher enterprise value is usually a larger company than one with a lower enterprise value.

Third, enterprise value is a good measure of a company's true liquidity. This is because it includes both equity and debt. So, all else being equal, a company with a higher enterprise value is usually more liquid than one with a lower enterprise value.

Market Cap vs. Enterprise Value: Which is Better?

There is no simple answer to this question. It depends on what you are trying to measure.

If you are trying to measure a company's value, then enterprise value is the better metric. This is because it takes into account both equity and debt.

If you are trying to measure a company's size, then market capitalization is the better metric. This is because it only includes the value of a company's equity.

If you are trying to measure a company's liquidity, then market capitalization is the better metric. This is because it only includes the value of a company's equity.

Final Thoughts

Market capitalization and enterprise value are both important measures of a company's value. They are both good in different ways, and understanding the difference between the two is crucial for any investor.

Upgrade your financial models

Get started with Causal today.
Build models effortlessly, connect them directly to your data, and share them with interactive dashboards and beautiful visuals.