Enterprise Value vs. Market Capitalization: An Overview
Enterprise value and market capitalization are both measures of a company's market value. The two calculations are not identical, and the terms are certainly not interchangeable. Each offers a sense of a company's overall value and, more importantly, a number that can be used to compare its value to that of its competitors in the same industry. Both numbers are frequently used to determine a fair price to pay for a company's stock shares.
Market Capitalization
Marketcapitalization, often referred to as market cap, is a simple and direct way to calculate a company's size and value, and, consequently, its potential growth rate and risk outlook.
Key Takeaways
- Market capitalization is the sum total of all the outstanding shares of a company.
- Enterprise value takes into account the debt that the company has taken on.
- Enterprise value, therefore, can identify strengths or weaknesses that market cap cannot.
Market cap is the total value of all outstanding shares of the company's stock. It is calculated by multiplying the stock's current share price and the number of shares outstanding. The figure is one of the key statistics that appears with every stock listed in a financial news site or broker's site.
For example, if XYZ stock is trading at $14 per share and has 2 million shares outstanding, its market capitalization is $28 million.
Large-, Mid-, and Small-Cap
Market capitalization can also give you an idea of the growth and risk to expect from a particular stock. Companies are classified according to market capitalization. The broad categories are large-, mid-, and small-cap.
Generally, large-cap companies are well-established successful companies with steady streams of revenue. Their growth over time may be slow but steady. Their price swings are less volatile than those of smaller companies.
The most appealing small-cap stocks are those that are experiencing accelerated growth, but that growth probably will be at the cost of higher risk and price volatility.
Market capitalization provides an idea of the size of the business and makes it easy to identify peers within a sector.
Market capitalization demonstrates that share price alone tells you little about a company's overall value. Just because a stock has a high share price does not necessarily mean the company is worth more.
A great example of this is Ford Motor Company (F), with a seemingly low share price of $4.24as of April 3, 2020. However, Ford is a huge automaker. If you look at its market capitalization, which was about $18billion, you can see that the company is worth quite a lot.
If a company were to be purchased, market capitalization would reflect the cost to acquire the outstanding equity.
Enterprise Value
Marketcapitalization omits some important facts in the overall valuation of a company. Most importantly, it does not take into consideration the company's debt.
Enterprise value is used to spot companies that have been undervalued by the markets.
Enterprise value is a moreaccurate measure of a company's real worth because it takes into consideration its debt obligations.
To calculate enterprise value, add the company's market capitalization to its outstanding preferred stock and all debt obligations, then subtract all of its cash and cash equivalents.
Value-Spotting
Enterprise value is commonlyused by value investors as a way to spot companies that have been undervalued by the markets. A company with solid earnings and possibly even a decent dividend looks good on the surface. The company might also have a large market capitalization. However, if you look further and calculate the company's enterprise value, you may find serious debt obligations that could pose a problem.
If you compare the enterprise value of an equally well-earning company and find it has a higher enterprise value, purchasing the latter stock would be a better overall value.
FAQs
Key Takeaways. Market capitalization is the sum total of all the outstanding shares of a company. Enterprise value takes into account the debt that the company has taken on. Enterprise value, therefore, can identify strengths or weaknesses that market cap cannot.
What is the difference between market capitalization and enterprise value? ›
Enterprise value is the total value of a company, while market value is the value of its shares on the stock market. Market capitalization is the total value of all shares on the stock market and does not take into account the value of a company's cash or debts.
Should EV be higher than market cap? ›
A higher EV to Market Capitalization ratio is generally not preferred. It means that the firm has an Enterprise value greater than the Market capitalization, or in other words, that the company high levels of debt and preference shares. Such firms are deemed risky.
What is the difference between market value and market capitalization? ›
Market capitalization is the number of a company's shares outstanding multiplied by the current price per single share. Market value is more complicated. It's assessed using numerous metrics and multiples including price-to-earnings, price-to-sales, and return-on-equity.
What is the market cap of Apple vs enterprise value? ›
Apple has a market cap or net worth of $3.39 trillion. The enterprise value is $3.29 trillion.
How do you calculate enterprise value without market cap? ›
The enterprise value is calculated by taking the equity value of a company, and then adding non-equity claims, such as net debt, preferred stock, and minority interest (i.e. non-controlling interest).
What does enterprise value tell you? ›
Enterprise Value Definition
EV, on the other hand, explains how much a business is worth in terms of purchase price. Essentially, if you wanted to buy a public company, you would need to pay off all the company's debts and buy out its shareholders — enterprise value shows how much that would cost.
Why do we subtract cash from enterprise value? ›
Cash and Cash Equivalents
We subtract this amount from EV because it will reduce the acquiring costs of the target company. It is assumed that the acquirer will use the cash immediately to pay off a portion of the theoretical takeover price.
How to go from enterprise value to equity value? ›
To calculate equity value from enterprise value, subtract debt and debt equivalents, non-controlling interest and preferred stock, and add cash and cash equivalents. Equity value is concerned with what is available to equity shareholders.
Is market value of invested capital the same as enterprise value? ›
While both EV and MVIC are measures of total business value, both are considered to be 'capital structure neutral', and both facilitate a relative value analysis. Yet there are significant differences between the two. Put simply, MVIC includes cash assets, while EV excludes such assets.
Market cap, or market capitalization, is one way of measuring a company's total value, based on outstanding shares of stock. A company's market cap will fluctuate with its share price. Investors can use market cap to gauge public interest and company strength.
What is a good PE ratio? ›
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio. But it doesn't stop there, as different industries can have different average P/E ratios.
Is market cap a good way to value a company? ›
Market cap can be a valuable tool for investors watching stocks and evaluating potential investments. Market capitalization is a quick and easy method for estimating a company's value by extrapolating what the market thinks it is worth for publicly traded companies.
Why use enterprise value instead of market cap? ›
Enterprise value is a more accurate measure of a company's real worth because it takes into consideration its debt obligations.
How much enterprise value is good? ›
What Is A Good Enterprise Value? EV is a good indicator of a firm's total value, but EV/EBITDA is an even better indicator. The lower the ratio, the better the value. A below 10 EV/EBITDA is considered healthy.
What is the most valuable company in the world? ›
Largest Companies by Market Cap
| # | Name | M. Cap |
|---|
| 1 | Apple 1AAPL | $3.382 T |
| 2 | Microsoft 2MSFT | $3.200 T |
| 3 | NVIDIA 3NVDA | $2.921 T |
| 4 | Amazon 4AMZN | $1.957 T |
57 more rowsKey Takeaways. Market capitalization is the total dollar value of all outstanding shares of a company. Equity is a simple statement of a company's assets minus its liabilities. It is helpful to consider both equity and market capitalization to get the most accurate picture of a company's worth.
Do you buy equity value or enterprise value? ›
Equity Value represents the actual amount a buyer will pay to a seller for a business having made certain adjustments for matters such as cash, debt and working capital. An offer to buy a business will usually be made in terms of the Enterprise Value, and the Equity Value is what will ultimately be paid to the seller.
What is the difference between capital employed and enterprise value? ›
Enterprise Value, or the Value of Capital employed, corresponds to the Market value of the enterprise's machines and commercial activities. Enterprise Value is equal to the Market value of the Shareholders' equity (Stock Market capitalisation if a company is quoted) plus the Market value of the Net financial debt.
