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. 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. 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. Market Cap and Enterprise Value
How Does Enterprise Value Affect Decision Making
How Investors May Take Advantage
Market Capitalization vs Enterprise Value FAQs
Market capitalization is a measure of the dollar value of all outstanding shares of a company, while enterprise value takes into account equity as well as debt. In simple terms, market capitalization evaluates the equity portion only, while enterprise value considers both debt and equity.
Market capitalization is commonly used when comparing companies within the same industry, as it provides a quick snapshot of which company has the highest value based on its stocks alone. Enterprise value should be used when comparing similar companies across industries, or assessing acquisitions, as it takes into account both debt and equity.
No, market capitalization only includes the dollar value of all outstanding shares of a company, which does not include any debt obligations.
Enterprise value includes both the equity portion (market capitalization) as well as the debt obligations of a company.
The formula for calculating Enterprise Value is EV = Market Capitalization + Total Debt - Cash and Equivalents. This takes into account both the equity portion (market capitalization) and any debt obligations while subtracting any cash and equivalents.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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