Both measures are vital to assess the financial health of a firm, they differ in their perception of the value of an organization’s overall. Understanding the distinction between Market Cap and Enterprise Value will help you make educated procurement decisions that align with your investment goals.
Market Cap, also known as market capitalization is the total value of the company’s outstanding shares listed http://www.dataroomtalk.info/how-to-evaluate-virtual-data-room-companies-services/ on the stock exchange. It does not include a company’s outstanding debt, which can cause a false impression of the value of the company. Enterprise Value however adds a company’s debt to its equity, and subtracts it from its cash balance to provide a more complete picture of a business’s worth.
By adding a company’s debt, it gives you an idea of the firm’s financial obligations that have to be paid over time, as well as the ability of the company to invest in growth opportunities and pay dividends to shareholders. In the same way, subtracting a company’s cash provides you with an idea of its liquidity – the amount of cash it has available.
The EV to Market Cap ratio offers an easy method to screen companies for investment potential however, it cannot replace due diligence or financial modeling. The EV to market cap ratio is not a good measure of a firm’s relative worth in comparison to its peers as it does not take into consideration the differences in the structure of capital and risk profiles.