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Although market cap is a useful measure, it has significant limitations in terms of identifying the true size and worth of a company. Contrary to that, enterprise value is a more comprehensive measure of the worth of a company that takes into account the entirety of a company’s dataroomtalk.info capital structure including debt and cash.

The formula to calculate the value of an enterprise is easy: current price of shareholders (market cap) plus the total of short- and long-term debt, plus the total of all preferred equity and minority interest as well as cash and cash equivalents. Enterprise value is typically used to compare companies in the same industry and is a fundamental driver for valuation multiples such as EBITDA/EV and EV/Sales.

Companies and investors who want to buy a new company rely on EV as it provides a detailed and theoretical analysis of the value of a company’s assets in the market. It also has some important differentiators from market cap such as the fact that it isn’t dependent on fluctuations in the direction of trading.

Market cap is commonly used to categorize companies into categories such as mid-caps or large-caps small-caps but the EV number isn’t. Both can be useful for investors and entrepreneurs to evaluate a company’s ability to grow on the market. Enterprise value can ultimately help investors to identify risks like debt versus cash available. It can also help determine a company’s ability to generate income in relation to capital available. This is especially relevant for companies with an excessive amount of debt compared to equity.