While both measures are important in assessing the financial health of an organization however, they differ in their views of a business’s overall value. Understanding the distinction between Market Cap and Enterprise Value will help you make educated procurement decisions that align with your investment goals.
Market capitalization is a measure of the value that a company can get from its outstanding shares listed on the market. It does not include the company’s outstanding debt, which could cause a false impression of the value of a company’s assets. Enterprise Value is an alternative, but it adds the debt of a business to its equity and subtracts cash for an overall picture of its value.
By adding a company’s debt, it gives you an idea of the company’s financial obligations that need to be paid over time, as well as the ability of the company to invest in growth opportunities and pay dividends to shareholders. Similarly, subtracting a company’s cash reserves gives you an idea of its liquidity – the amount of cash available.
The EV/Market Cap ratio can be a quick and easy way to screen potential investments. However it’s not a substitute dataroomtalk.info for due-diligence or financial modeling. The EV to market cap ratio is not a good measure of a company’s relative worth against its competitors because it doesn’t take into consideration the differences in capital structures and risk profiles.