Both measures are useful to assess a company’s financial health, however they offer different perspectives on the business’s value. Understanding the distinction between Market Caps and Enterprise Values can help you make informed buying decisions that are in line with your investment goals.
Market Cap, or market capitalization is the value of a company’s outstanding shares listed on the stock exchange. It does not take into account the company’s debt, and therefore it could give an inaccurate picture of the overall worth of a business. Enterprise Value, on the other hand is a way to add a company’s debt to its equity, and subtracts its cash balance to provide a more complete view of a company’s worth.
The calculation of a company’s debt will give you an idea of the financial obligations it has to settle over time. It also gives you an idea of its ability to invest and pay dividends. Also, subtracting a company’s cash gives you an idea of its liquidity, which is the amount of cash in its bank.
The EV/Market Cap ratio is an efficient and quick method to determine the potential investment. However it is not a substitute for due diligence or financial modeling. The EV to market cap ratio is also not a reliable measure of a firm’s relative worth in comparison to its peers VDR providers since it doesn’t take into consideration the differences in the structure of capital and risk profiles.