Enterprise Value Vs. Market CapitalizationComparison with Key Differences

Written By:
Lisa Borga

Market capitalization and enterprise value are two different ways to measure the market value of a company.

However, these metrics are different and use different approaches to determine a company’s value.

But, they do both provide a number that can be used to compare a company with other companies in the same industry.

These numbers can also be used to decide what a fair price would be for the shares of a company’s stock.

Market Capitalization

Market capitalization, which is also called market cap, is the total market value of a company’s publicly traded shares.

It works as an easy way to compute the value and size of a company, which can then be used to estimate the potential growth rate and outlook for the company.

How To Calculate Market Cap

Market cap is the total market value of all of the shares a company has issued.

It can be calculated by multiplying the current share price of the company’s stock by the number of shares currently outstanding.

This figure will appear for every stock that is listed on a broker’s site or on a financial news site since it is a key statistic.

As an example, suppose SAMPLE stock is trading for $20 per share, and it has outstanding shares of 5 million. It would have a market capitalization of $100 million.

Types of Market Capitalization

Market capitalization is a quick way to get an idea of what a company’s value is as well as what its risk and growth potential may be.

Companies are generally separated into three broad categories by investors based on their market cap.

These are small-cap, mid-cap, and large-cap.

Large-cap

Large-cap companies are often market leaders.

They generally have lower risk than other companies but also less growth potential.

Investors may get less of a return with these stocks.

However, they are more likely to receive dividends than they would be with mid-cap or small-cap companies.

Mid-cap

Mid-cap companies are generally trying to increase their market share.

These companies may have less risk than small-cap companies and yet still have more growth potential.

Small-cap

Small-cap companies have a large potential for growth, which also means a lot of potential profit.

But, these companies also carry more risk and have more price volatility.  

Market capitalization also shows that the share price of a company doesn’t indicate a lot about the overall value of a company without additional information.

A company with a high stock price isn’t always worth more than a company with a moderate or lower stock price.

Although, if an investor were to purchase a company, market capitalization would indicate what it would cost the investor to purchase the outstanding equity in the company.

Enterprise Value

There are some important factors that market capitalization does not take into account when calculating a company’s overall value.

One very important factor it does not consider is the debt a company has.

Enterprise value is often used as a way to find companies that the markets have undervalued.

Because enterprise value takes a company’s debt obligations into consideration, unlike market capitalization, enterprise value more accurately measures the value of a company.

In order to compute enterprise value, a company’s debt obligations and preferred stock are added to its market capitalization, and then all of the company’s cash and cash equivalents are subtracted from this total.

Identifying a Value

Investors often use enterprise value in order to identify companies that are being undervalued in the current market.

Companies that have good earnings and possibly even a reasonable dividend can appear good at first glance.

The company could even have large market capitalization.

But, upon more careful examination, if you take the time to calculate the enterprise value of the company, you could find that the company has significant debt obligations that might end up causing problems.

It would likely be better to purchase another company with good earnings if it has a higher enterprise value.

Key Takeaways

• Market capitalization is the current market value of all of a company’s outstanding shares of stock.
• Enterprise value considers a company’s debt obligations.
• Because enterprise value considers a company’s debts, it is able to ascertain the advantages and disadvantages of a company that market capitalization may not.