There are three different concepts and measures used to determine and represent the value of a company. These are market capitalization or market cap, market value, and enterprise value. All three are expressed in monetary amounts and are used in business and investment valuation. They also have some overlaps or similarities but have differentiating definitions, calculations, and applications. A general understanding of the difference between market cap, market value, and enterprise value should be a basic requirement for investors who want to invest in stocks or publicly traded companies and even in private companies.
Explaining the Difference Between Market Cap, Market Value, and Enterprise Value
Definitions
Market cap represents the total market value of the outstanding shares of common stock of a publicly traded company. It is based on the current stock price and the number of outstanding shares that are traded in a stock market or specific stock exchange.
The concept of market value is somewhat similar but it is more exhaustive. The market cap of a company does not represent its true market value. The actual market value takes into account different fundamentals and metrics like price-to-sales and price-to-earnings.
Enterprise value is the most comprehensive of the three measures of value. It factors in market cap or shares of common stock, shares of preferred stock, issued bonds and other outstanding debts, other debt-deemed liabilities, and cash and cash equivalents.
Calculations
Market cap is calculated by multiplying the current stock price by the shares outstanding. A company that trades at $100 per share in the stock market and has issued 10 million outstanding shares to all its shareholders will have a market capitalization of $1 billion.
The calculation of the market value of a company is inherently complex. There is no single standard to do so because it is determined by multiples accorded by investors like price-to-sales and price-to-earnings and factors like debt and growth potential.
Enterprise value is calculated by adding market capitalization and total debt or all outstanding liabilities like bonds and loans and subtracting cash and cash equivalents. Both cash and cash equivalents are subtracted to avoid double-counting the value.
Applications
Remember that all three are used in valuation. Market cap is specifically used in stock valuation for the purpose of trading shares or supporting informed investment decisions. It also reflects how much investors believe a publicly traded company is worth.
The application of market valuation is similar to the applications of market cap and enterprise value. These two can be metrics of market value. It is used to make informed investment decisions, track company performance, and determine long-term growth potential.
Enterprise value builds on the strength of market cap and adds a more comprehensive picture of the value of a company. It is used in comprehensive investment decisions because it can be useful for tracking financial performance, comparative analyses, and risk management.