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Market Cap Vs Enterprise Value

While both are essential for assessing the financial health of an organization They differ in their view of a business’s overall value. Understanding the difference between Market Caps and Enterprise Values will help you make educated buying decisions that align with your investment goals.

Market capitalization is the amount that a company can get from its outstanding shares traded on the stock market. It doesn’t consider the company’s debt, and therefore it may give an inaccurate perception of the overall worth of a business. Enterprise Value, on the other hand is a way to add the debt of a company to its equity, and subtracts it from its cash to provide a more complete view of a company’s worth.

The calculation of a company’s debt gives you an idea of the financial obligations it will have 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 gives you an idea of its liquidity, which is the amount of cash it has in its bank.

The EV/Market Cap ratio can be a quick and easy way to screen potential investments. However it’s not an alternative to due-diligence or financial modeling. Additionally, the EV to Market Cap ratio is not a reliable measure of a company’s relative value to its peers, as it fails to account for differences in each firm’s unique capital structures and risk profiles.

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