Both measures are useful in evaluating a company’s financial dataroomtalk.info health, but they offer different perspectives regarding the company’s value. Understanding the distinction between Market Caps and Enterprise Values can help you make informed purchasing decisions that align with your investment goals.
Market capitalization is the amount the company has in its outstanding shares that are listed on the stock market. It doesn’t consider the company’s debt, and therefore it can provide a false sense of the overall worth of a business. Enterprise Value however is a way to add a company’s debt to its equity, and subtracts it from its cash to give a more complete picture of a business’s worth.
The addition of a company’s debt gives you an idea of the company’s financial obligations that need to be paid over time, and its capacity to invest in growth opportunities and pay dividends to shareholders. The process of subtracting money from a company gives you a sense of its liquidity or the amount of cash that it has available.
The EV/MarketCap ratio provides an easy and quick way to screen potential investments. However, it does not replace due diligence or financial modeling. Furthermore, the EV to Market Cap ratio is not a reliable measure of a company’s worth against its peers, since it fails to take into account differences in each firm’s unique capital structures and risk profiles.