Market Cap vs Enterprise Value
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Market Cap and Enterprise Value
Market capitalization, or market cap, is the combined value of a company’s outstanding stock. It is an estimate of the total value of a company.
A related metric called enterprise value is more useful than market cap in many cases.
Enterprise value takes the market cap, then adds the debt on the balance sheet and subtracts the cash.
How Does Enterprise Value Affect Decision Making
For companies with a lot of debt or a lot of cash, enterprise value is much more useful than the market cap, and better reflects the “true price” of the company.
If someone were to buy the company outright, the acquirer would have to take on the debt but could pocket the cash.
This affects the total amount of money paid.
How Investors May Take Advantage
Market capitalization is used as a convenient metric to estimate the total value of a company.
It is an estimate of how much it would cost to buy a company by purchasing all of the outstanding shares on the open market.
However, companies that are purchased outright via a takeover usually require a premium to be paid above the current market price.
This is due to the fact that an acquisition often gives the purchasing company a competitive advantage.