Market Cap vs. Enterprise Value
Why the price of a company's shares isn't the price of the whole business, how enterprise value adjusts for debt and cash, and which measures to pair with each.
The short version
Market capitalization is the value of a company's shares: price times shares outstanding. Enterprise value estimates the price of the whole business: market cap plus debt, minus cash. Two companies with the same market cap can have very different enterprise values if one carries heavy debt and the other holds lots of cash. Pair market cap with measures that belong to shareholders, like net income, and enterprise value with measures that belong to everyone who funds the business, like operating income, EBITDA, or revenue.
By the end of this lesson, you'll be able to
- Calculate market capitalization and enterprise value
- Explain why debt and cash change what a business costs
- Match each measure of value with the right measure of profit
Why this matters
Shares Outstanding and Market Capitalization showed that market cap is the share price times the number of shares. But if you bought every share of a company, you'd also take on its debts and get its cash. Two companies with identical market caps can cost very different amounts as whole businesses. Enterprise value captures that difference.
Two measures of size
Market capitalization = Share price × Shares outstanding
Enterprise value = Market capitalization + Debt − Cash
Think of buying a house that comes with a mortgage you must take over and a safe full of cash you get to keep. The real cost is the price, plus the mortgage, minus the cash. Enterprise value. An estimate of what it would cost to buy a whole company: the value of its shares plus its debt, minus its cash. Glossary applies the same idea to a company.1
| $ millions | Amount |
|---|---|
| Share price × shares: $50 × 20 million | 1,000 |
| Plus long-term debt | +90 |
| Minus cash | −60 |
| Enterprise value | 1,030 |
STU Corp has little net debt, so its enterprise value is only 3% above its market cap. For heavily indebted companies, the gap can be enormous.
Two fictional companies each have a $1 billion market cap.
| $ millions | Company H | Company N |
|---|---|---|
| Market cap | 1,000 | 1,000 |
| Debt | 600 | 0 |
| Cash | 100 | 400 |
| Enterprise value | 1,500 | 600 |
Buying all of Company H costs effectively $1.5 billion, because you'd inherit $500 million of net debt. Buying Company N costs effectively $600 million, because $400 million of the price comes back as cash. Judged by market cap alone, they look identical.
The rest of this lesson is for members
Still to come in this lesson: Match the measure of value to the measure of profit, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Shares Outstanding and Market CapitalizationPart 2: What You Can Own
- Capital StructureCorporate Finance (depth track)
- Sum-of-the-Parts ValuationValuation and Modeling (depth track)
Notes and sources
- Fuller versions of enterprise value also add items like preferred stock and the stakes of minority owners in subsidiaries, and some include lease obligations. For most companies, debt and cash are the main adjustments. Back to text