Community Forex Questions
What are the key differences between market cap and enterprise value (EV)?
Market Capitalisation (Market Cap) measures a company’s equity value and is calculated as:
Market Cap = Share Price × Total Outstanding Shares
It represents the market’s valuation of a company’s equity but ignores debt, cash, and other financial obligations.
Enterprise Value (EV) provides a more comprehensive valuation by accounting for debt, cash, and minority interests. It is calculated as:
EV = Market Cap + Total Debt – Cash & Equivalents
Key Differences:
Debt & Cash Adjustment – EV includes debt (obligations) and subtracts cash (liquid assets), giving a clearer picture of a company’s true takeover cost. Market cap does not consider these factors.
Takeover Perspective – EV reflects what it would cost to acquire the entire business, whereas market cap only values equity.
Comparability – EV allows better comparisons between companies with different capital structures (e.g., a highly leveraged firm vs. a cash-rich one).
Valuation Metrics – EV is used in multiples like EV/EBITDA and EV/Sales, which are more reliable than P/E (which only uses market cap).
Example: If Company A has a $10B market cap, $2B in debt, and $1B in cash, its EV is $11B ($10B + $2B - $1B). A competitor with the same market cap but no debt and $3B cash would have an EV of $7B, making it cheaper in an acquisition scenario.
Conclusion
While market cap is useful for equity valuation, EV provides a fuller picture of a company’s financial health, especially in M&A and leveraged buyouts. Investors should consider both when analysing stocks.
Market Cap = Share Price × Total Outstanding Shares
It represents the market’s valuation of a company’s equity but ignores debt, cash, and other financial obligations.
Enterprise Value (EV) provides a more comprehensive valuation by accounting for debt, cash, and minority interests. It is calculated as:
EV = Market Cap + Total Debt – Cash & Equivalents
Key Differences:
Debt & Cash Adjustment – EV includes debt (obligations) and subtracts cash (liquid assets), giving a clearer picture of a company’s true takeover cost. Market cap does not consider these factors.
Takeover Perspective – EV reflects what it would cost to acquire the entire business, whereas market cap only values equity.
Comparability – EV allows better comparisons between companies with different capital structures (e.g., a highly leveraged firm vs. a cash-rich one).
Valuation Metrics – EV is used in multiples like EV/EBITDA and EV/Sales, which are more reliable than P/E (which only uses market cap).
Example: If Company A has a $10B market cap, $2B in debt, and $1B in cash, its EV is $11B ($10B + $2B - $1B). A competitor with the same market cap but no debt and $3B cash would have an EV of $7B, making it cheaper in an acquisition scenario.
Conclusion
While market cap is useful for equity valuation, EV provides a fuller picture of a company’s financial health, especially in M&A and leveraged buyouts. Investors should consider both when analysing stocks.
Jul 23, 2025 02:21