Enterprise Value vs. Market Capitalization: An Overview
Enterprise value is the sum of a company’s market capitalization and total debt, less its cash and cash equivalents. It is a metric considered by many to be more accurate than market capitalization.
Market capitalization is the product of a company’s number of outstanding shares and current market value. It is a metric used to estimate a company’s value quickly.
Each offers a sense of a company’s overall value and, more importantly, a number that can be used to compare its value to that of its competitors in the same industry. Both numbers are frequently used to determine a fair price for a company’s stock shares.
Market Capitalization
Market capitalization (market cap) is a simple and direct way to calculate a company’s size and value, and, consequently, its potential growth rate and risk outlook.
Market cap is the total value of all outstanding shares of the company’s stock. It is calculated by multiplying the stock’s current share price by the number of shares outstanding. The figure is one of the key statistics that appears with every stock listed in a financial news site or a broker’s site.
For example, if XYZ stock is trading at $14 per share and has 2 million shares outstanding, its market capitalization is $28 million.
Large-, Mid-, and Small-Cap
Market capitalization can also give you an idea of the growth and risk to expect from a particular stock. Companies are classified according to market capitalization. The broad categories are large-, mid-, and small-cap.
Generally, large-cap companies are well-established successful companies with steady streams of revenue. Their growth over time may be slow but steady. Their price swings are less volatile than those of smaller companies.
The most appealing small-cap stocks are those that are experiencing accelerated growth, but that growth probably will be at the cost of higher risk and price volatility.
Market capitalization demonstrates that share price alone tells you little about a company’s overall value. Just because a stock has a high share price does not necessarily mean the company is worth more.
A great example of this is Ford Motor Company (F), with a seemingly low share price of $9.63 as of April 19, 2025. It had 3.963 billion outstanding shares. However, Ford is a huge automaker. Its market capitalization was about $38 billion, demonstrating its market value.
If a company were to be purchased, market capitalization would reflect the cost to acquire the outstanding equity.
Enterprise Value
Market capitalization omits some important facts in the overall valuation of a company. Most importantly, it does not take into consideration the company’s debt. It is calculated by adding its market cap and total debt, then subtracting all cash and cash equivalents.
Enterprise value is a more accurate measure of a company’s real worth because it takes into consideration its debt obligations.
Value-Spotting
Enterprise value is commonly used by value investors as a way to spot companies that have been undervalued by the markets. A company with solid earnings and possibly even a decent dividend looks good on the surface. The company might also have a large market capitalization. However, if you look further and calculate the company’s enterprise value, you may find serious debt obligations that could pose a problem.
If you compare the enterprise value of an equally well-earning company and find it has a higher enterprise value, purchasing the latter stock would be a better overall value.
Should Enterprise Value Be Higher than Market Cap?
Market cap can be higher or lower than enterprise value. If market cap is lower, it means the company has more debt than cash, or more cash than debt. If EV is negative, it means the company has more cash than it does debt and market cap. All three circumstances require further analysis.
How Do You Convert Enterprise Value to Market Cap?
To convert enterprise value to market cap, subtract total debt and add cash and cash equivalents.
Is TEV the Same As Market Cap?
Total enterprise value is the same as enterprise value, so it is not the same as market cap.
The Bottom Line
Market capitalization and enterprise value are two metrics used to value a company. While useful in many circumstances, market cap is more simple, and thus, less useful when valuing a company than enterprise value.
