Both measures are vital for assessing the financial health of an organization but they differ in their view of a business’s overall value. Understanding the difference between Market Cap and Enterprise Value will help you make educated purchase decisions that align with your investment goals.

Market Cap, also known as market capitalization, is the total value of a company’s outstanding shares on the stock exchange. It doesn’t consider the company’s debt, therefore it can give an inaccurate impression of a company’s worth. Enterprise Value however is a way to add a company’s debt to its equity, and subtracts it from its cash balance to provide a more complete picture of a company’s value.

Addition of a firm’s debt gives you an idea about the financial obligations it is required to pay over time. It will also give you an idea of its ability to invest and pay dividends. Also, subtracting a company’s cash will give you an idea of its liquidity – the amount of cash on hand.

The EV/MarketCap ratio provides an easy and quick way to screen potential investments. However, it does not replace due diligence or financial modeling. The EV to market cap ratio is also not a good measure of a company’s worth against its visit the site competitors because it does not take into account the differences in the structure of capital and risk profiles.