Market cap is an important measure however it comes with many limitations in determining the real size and worth of a business. Contrary to that, enterprise value is a more holistic measure of the value of a company that takes into account all aspects of a firm’s capital structure, including debt and cash.

The formula used to calculate a company’s Enterprise Value is easy it is: Current shareholder price (market capitalization) plus total long and short-term loans plus preferred stock and minorities as well as cash and cash-equivalents. Enterprise value is often used when comparing companies in the same industry and is the primary driver behind valuation multiples like the EV/EBITDA ratio and EV/Sales.

Businesses and investors looking to acquire a business rely on EV because it provides a thorough mathematical calculation of the value a business has in the market. It’s different from market capitalization because it does not rely on the occurrence of fluctuations in trading trends.

Although market cap is frequently used to classify companies into categories like mid-caps, large-caps, and small-caps, the EV number isn’t. Both can be helpful for investors and entrepreneurs to assess a company’s potential to expand its market share. Enterprise value can ultimately help investors to identify risks like debt in relation to the cash available. It can also help determine the capacity of a company to earn profits in relation to the capital in the bank. This is especially crucial for companies with significant amounts of debt as compared to equity.