Market Cap, or market capitalization is the value of a company’s outstanding shares on the stock exchange. It does not include the company’s outstanding debt, which could result in a false impression of the value of a company’s assets. Enterprise Value, on the other hand is a method of adding a company’s debt to its equity, and subtracts it from its cash balance to provide a more complete view of a company’s worth.
A company’s debt can give you an idea of the company’s financial obligations that need to be paid over time, and its capacity to invest in growth opportunities and pay dividends to shareholders. Additionally, subtracting the company’s cash gives you an idea of its liquidity – the amount of cash it has in its reserves.
The EV to Market Cap ratio offers an easy method of screening potential investment opportunities for companies but it doesn’t substitute due diligence or financial modeling. The EV to market cap ratio is also not a reliable measure of a company’s relative worth to its peers because it doesn’t take into account the differences in capital structures and risk profiles.
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