Enterprise Value and Market Capitalisation: Understanding a company's valuation is crucial for investors, analysts, and corporate decision-makers. Two commonly used metrics in the realm of company valuation are Enterprise Value (EV) and Market Capitalisation (Market Cap). While both metrics aim to assess a company's value, they do so from different perspectives and incorporate distinct factors.
This article will explore the differences between Enterprise Value and Market Capitalisation, exploring their definitions, calculations, components, and implications. By differentiating between these metrics, stakeholders can gain deeper insights into company valuation and make more informed investment and strategic decisions.Formula : Market Capitalization = Market Price per Share x Outstanding Shares
Example : Let's say a company called "Sporty Shoes Inc." has: A current share price of $20 per share. 50 million outstanding shares. Following the formula : Market Capitalization (Sporty Shoes Inc.) = $20/share x 50,000,000 shares = $1,000,000,000Enterprise value = market cap + market value of preference shares + total debt + minority interest − total cash and cash equivalents
This formula reveals that if a company has less cash and higher debt, its EV may surpass its market cap. Conversely, if the company has more cash and lower debt, its EV may be lower than its market cap.Difference between Enterprise Value and Market Capitalisation | ||
Aspect | Enterprise Value (EV) | Market Capitalisation (Market Cap) |
Definition | Comprehensive measure of a company's total value, considering debt, cash, and equity. | Measures the total value of a company's outstanding shares of common stock in the market. |
Calculation | EV = Market Cap + Debt + Minority Interest - Cash | Market Cap = Share Price x Total Outstanding Shares |
Components | Includes market value of equity, debt, minority interest, and cash. | Considers only the market value of a company's equity (common shares). |
Focus | Focuses on the total value of the company, including debt and cash positions. | Focuses solely on the value of equity, representing ownership in the company. |
Representation | Represents the true takeover value of a company. | Represents the value of the company from the perspective of equity shareholders. |
Financial Perspective | Considered from a buyer's perspective in a potential acquisition. | Reflects the market sentiment towards the company's stock. |