Market Cap vs Enterprise Value

Introduction

Market Cap vs Enterprise Value are thrown around in finance circles without truly understanding what they mean? Don't worry; you're not alone. These two phrases may seem interchangeable at first, but they are entirely different evaluation metrics .

Meaning of Market Cap

Market cap is short for market capitalization, which measures a company's value in the stock market. Market cap is an important metric for investors because it indicates a company's size and potential for growth and volatility. The resulting figure represents the total dollar value of all the company's outstanding shares.

Market Cap Explained

Market Cap is an important metric for investors because it provides a quick and easy way to assess a company's overall size and worth. Companies with a higher market cap are generally viewed as larger and more established, while those with a lower market cap are often smaller and less established.

The formula for market cap is simple −

$$\mathrm{Market\: Cap = \:Current \:Stock \:Price \:x \:Total \:Number \:of \:Outstanding \:Shares}$$

For example, if a company has 10 million outstanding shares and its current stock price is $50, its Market Cap would be $500 million (10 million x $50).

Enterprise Value Explained

Enterprise Value is a measure of a company's total value, considering not just its equity value but also its debt, cash, and other assets.

The formula for calculating Enterprise Value is as follows −

$$\mathrm{Enterprise \:Value = \:Market\:\: Cap + \:Total \:Debt \:- Cash\: and \:Cash\: Equivalents}$$

This formula considers a company's Market Cap, which is the value of its outstanding shares and its total debt and cash and cash equivalents. Enterprise Value provides a complete picture of a company's worth by including these additional factors.

For example, a company has a Market Cap of $500 million, total debt of $100 million, and $50 million in cash and cash equivalents. Using the formula above, the company's Enterprise Value would be $550 million ($500 million + $100 million - $50 million).

Comparison Between Market Cap and Enterprise Value

Market Cap and Enterprise Value are two popular metrics investors use when evaluating a company's worth. While they are both useful in their way, there are some important differences between them.

Enterprise Value takes both equity and debt

One key difference between Market Cap vs Enterprise Value is that Market Cap only considers a company's equity value, while Enterprise Value factors in equity and debt. It means that a company with a high Market Cap may not necessarily have a high Enterprise Value if it also carries a significant amount of debt.

Enterprise Value can fluctuate depending on its debt levels and cash holdings, while its Market Cap is largely determined by the stock market.

Differences Between Market Cap and Enterprise Value Key

Here are some of the key differences in determining Market Cap vs Enterprise Value −

Parameter of Difference	Market Cap	Enterprise Value
Definition	It is the total value of a company's outstanding shares.	It is the total value of a company, including its debt and cash.
Calculation	Market Cap = Stock Price x Outstanding Shares	Enterprise Value = Market Cap + Debt − Cash
Equity vs. Total Value	It considers only equity value.	It takes into account equity, debt, cash, and other assets.
Usefulness	It is useful for comparing companies of different sizes and industries.	It is useful for comparing companies with similar debt levels.
Volatility	It can fluctuate based on stock price changes.	It can fluctuate based on debt levels and cash holdings.
Acquisition Valuation	It is not appropriate for determining acquisition valuation.	It is more suitable for determining acquisition valuation.
Stock Performance	It is used to measure shareholder value.	It is not as relevant in measuring shareholder value.

Examples of Market Cap and Enterprise Value

Here are two examples of Market Cap vs Enterprise Value −

Example 1: Apple Inc

The Market Cap of Apple Inc. as of March 2023 is approximately $2.619 trillion. This implies that buying all of Apple's outstanding shares at their current market price would cost you around $2.619 trillion.

The Enterprise Value of Apple Inc. as of March 2023 is approximately $2.6 trillion. It includes the market value of Apple's equity (i.e., its Market Cap) plus its debt minus its cash and cash equivalents. In other words, it represents Apple's business's total value, including equity and debt.

Example 2: Tesla Inc

The Market Cap of Tesla Inc. as of March 2023 is approximately $633.20 billion. It means that if you were to buy all of Tesla's outstanding shares at their current market price, it would cost you around $633.20 billion.

The Enterprise Value of Tesla Inc. as of December 2022 was approximately $604.7 billion. It includes the market value of Tesla's equity (i.e., its Market Cap) plus its debt minus its cash and cash equivalents. In other words, it represents the total value of Tesla's business, including equity and debt.

These examples illustrate how Market Cap vs. Enterprise Value can differ for the same company and how Enterprise Value can provide a more comprehensive picture of its overall value by considering its debt and cash holdings.

Conclusion

Understanding the differences between Market Cap vs Enterprise Value is crucial for investors when analyzing a company's financial health and overall value. Evaluating both metrics aids you to know the company's true worth better. These financial metrics can be used to make informed investment decisions that align with your goals and objectives.

FAQs

Q1. Which better indicates a company's overall value, between Market Cap and Enterprise Value?

Ans. Neither metric is a better indicator on its own, as they both provide different perspectives on a company's financial health. Investors should consider both when analyzing a company.

Q2. How can investors use Market Cap and enterprise value to make investment decisions?

Ans. Investors can use both metrics to better understand a company's financial health and potential for growth. Investors can make informed investment decisions by analyzing Market Cap vs Enterprise Value alongside other financial indicators.

Q3. How can enterprise value be used to compare companies?

Ans. Enterprise value can be used to compare companies of different sizes and with varying capital structures, as it accounts for debt and other liabilities.