Market Capitalization vs Enterprise Value

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on January 04, 2023

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.

 

Market Capitalization vs Enterprise Value FAQs

What does Market Cap stand for?

Market Cap is short for Market Capitalization.

What is Market Cap?

Market Capitalization is the aggregate dollar-value of all outstanding shares of a company’s stock.

Why do investors look at a company's Market Cap?

A company’s market cap is the first way an investor assesses how “big” a company is.

Is a company's Market Cap the true value of the company?

It is important to remember that a company’s market cap may be different than the true economic worth of their assets and ability to generate profits—market cap can be viewed as what the markets perceive a company to be worth.

About the Author

True Tamplin, BSc, CEPF®

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.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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