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What is the Difference Between Market Capitalisation and Enterprise Value?

Financial jargons can make reading analyst reports or financial statements a tedious affair. Having to search the Internet for the meaning of each complex financial term is no fun.

In a bid to make things simpler, I thought it would be good to clarify a pair of the more commonly confused financial terms – market capitalisation and enterprise value.

The terms market capitalisation and enterprise value both attempt to measure a company’s market value or how much it would take to purchase the company. Though similar in that sense, these terms are far from identical, and each has its method of calculation.

So, let’s take a quick look at some of these differences.

Market capitalisation

The market capitalisation of a company refers to the total value of all outstanding shares. In essence, it measures the total value of shareholders’ interest at current market prices.

For instance, if a company is trading at $10 per share and has 1 million shares outstanding, its market capitalisation is $10 million.

The market capitalisation of a company gives investors an idea of the size of the company and can be easily compared to all companies from different industries and sectors.

Enterprise value

Enterprise value is a more complicated but a more detailed way of deriving the value of a company. Market capitalisation looks only at the equity of the company, while enterprise value takes into account the debt obligations of the company as well.

It can be calculated by adding the market capitalization of the company to preferred stock and all debt obligations, before finally subtracting cash and cash equivalents. The enterprise value of the company can give investors a better idea of the true worth of the company after paying off its debt obligations.

For example, a company that has a market capitalisation of $10 million but a net debt of $8 million has an enterprise value of $18 million.

The Foolish bottom line

As investors, it is important we are able to differentiate between the multitudes of financial jargons that we may encounter along our investment journey.

Market capitalisation and enterprise value are just one pair of the many commonly-confused pairs of financial terms that we can encounter. I’ll cover more such pairs in the future, so do keep a lookout.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.