Market cap is an important measure however, it has a number of limitations in determining the true worth and size of a company. Enterprise value is a more comprehensive measure of the value of a business that takes into account all aspects of a business’s capital structure including debt and cash.
The formula for calculating a company’s enterprise value is as simple as the current share price (market cap) plus the total of long- and short-term debt plus the sum of all preferred shares and minority interests plus cash and cash equivalents. Enterprise value is frequently utilized when comparing companies of the same industry and is a fundamental driver for valuation multiples such as EV/EBITDA and EV/Sales.
Businesses http://www.dataroomtalk.info/market-capitalization-vs-enterprise-value/ and investors looking to acquire a new company rely on EV because it provides a comprehensive theoretic calculation of the value a business has in the market. It’s different from market capitalization because it is not based on the fluctuations in trading trends.
While market cap is typically used to classify businesses into categories such as mid-caps, large-caps, and small-caps however EV isn’t. Both are valuable for investors and entrepreneurs to determine a company’s potential to expand its market share. Enterprise value will ultimately help investors identify risks such as debt in relation with cash available. It will also reveal the ability of a business to generate income in relation to capital available. This is particularly relevant for companies that have an enormous amount of debt to equity.