Difference between Enterprise Value and Market Capitalisation

Enterprise Value

Enterprise value is defined as a method that is used to spot the companies which have been undervalued by the markets in our country. Enterprise value is a much more accurate measure of real worth because it helps to take into consideration the debt obligations of the firm. The enterprise value commonly is used by the value investors as a method to spot the companies which are being undervalued by the markets. Any company with solid earnings and a decent dividend do look good on the surface of the market valuation for the other companies. The company might also look at a large market capitalisation which will help to attract more shareholders. However, if you decide to look any further and calculate the enterprise value of a company, you may end up in finding serious debt obligations, which may end up posing a problem.

If you decide to compare the enterprise values of equally well-earning companies and find that it has a much higher enterprise value, then purchasing the latter stock would lead to a better overall value of the firm.

To calculate the enterprise value, the process starts by adding the market capitalisation value of a company to the preferred stock outstanding at the time, along with all the debt obligations of a company. The next step is to deduct all the cash and its equivalents to arrive at the final value of the enterprise.

Market Capitalisation

Market capitalisation (also known as market cap) is defined as a simple and direct method to help in the calculation of the overall market size and value of the company. It also helps to evaluate the risk outlook and potential growth rate of the firm in the industry. Market cap is defined as the total value of all the outstanding shares of the stocks and shares of an organisation. The process of calculation of the market capitalisation starts by multiplying the current share price of the company’s stock and its number of outstanding shares. This figure is then one of the main statistics that is valid for every stock that is listed in the broker’s or financial news site. The market capitalisation can also give a better idea of the overall risk and growth that we can expect from the particular stocks of a company. The companies are then classified according to the market capitalisation in terms of large-cap, mid-cap and small-cap. Market capitalisation helps to demonstrate that the share price does not give the entire picture of the overall value of a company.

Difference between Enterprise Value and Market Capitalisation

Both enterprise value and Market Capitalisation perform a very important role in helping ascertain the financial viability of a company. However, it must be noted that there are major points of difference between enterprise value and market capitalisation, and we should focus on those points below to get a wider perspective of these two instruments:

Enterprise Value

Market Capitalisation

Definition

Enterprise value is defined as a method that is used to spot the companies which have been undervalued by the markets in our country.

Market capitalisation (also known as market cap) is defined as a simple and direct method to help in the calculation of the overall market size and value of the company.

Company Debt

Enterprise value takes into consideration the debt of a company.

Market Capitalisation does not take into consideration the debt of a company.

Conclusion

There are a number of points of difference between enterprise value and market capitalisation. But they both perform a very crucial role in the functioning of the financial markets. Both these financial instruments help the investors and other stakeholders get a true picture of the financial position of a company in their industry and give the outside parties an idea of the predicted growth trajectory of the firm in the short as well as long run.

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