Enterprise value shows what it would cost to buy the whole business by accounting for debt and cash, while market capitalisation shows only the value of the company’s equity based on its share price and shares outstanding.
Enterprise value is often the better method for comparing companies because it includes obligations and resources that equity-only market cap ignores.
What is enterprise value?
Enterprise value is a company’s total value to all capital providers, calculated as
Enterprise Value = Market Cap + Total Debt − Cash and Cash Equivalents
Debt is added because a buyer must assume or repay it, and cash is subtracted because the acquirer gets that cash at closing, lowering the effective purchase price of the business.
EV is widely used in mergers and acquisitions because it reflects the approximate price to acquire the operating business irrespective of how it is financed today.
Market capitalisation in plain words
Market capitalisation is the current share price multiplied by total shares outstanding, so it reflects only what equity holders are worth at today’s market price.
It is a quick way to size a company but it ignores the balance sheet’s debt burden and cash cushion, which can dramatically change the economics of owning the whole business. Because market cap is equity-only, it can mislead comparisons between firms with very different leverage or cash levels.
Enterprise Value vs Market Capitalisation
| Aspect | Enterprise value | Market capitalisation |
|---|---|---|
| What it measures | Value of the operating business owed to both debt and equity holders | Value of equity only based on share price times shares |
| Includes debt? | Yes, adds total debt | No, excludes debt |
| Includes cash? | Subtracts cash and equivalents | No, excludes cash |
| Perspective | “Whole company” value, independent of financing structure for comparison purposes | Equity-holder perspective only |
| Common uses | M&A pricing, EV/EBITDA and EV/Sales comparables | Quick size ranking, equity-focused ratios like P/E |
| Can it be negative? | Yes, if cash exceeds debt plus market cap | No, cannot be negative by definition |
Also Read – What is the P/E ratio in simple terms? – 6 Important Points To Know
Why add debt and subtract cash?
Debt increases EV because an acquirer must take responsibility for repaying lenders, so the “all-in” cost of owning the business rises by that amount.
Cash decreases EV because the buyer receives the target’s cash at closing, which offsets part of the purchase price and lowers the net cost to own the business. This is why EV is often closer to a true takeover price than market cap alone.
Scenarios and causal effects
- High debt, low cash: Suppose two companies have the same market cap, but one carries heavy debt and little cash; EV will be much higher for the leveraged firm because EV\text{EV}EV rises with debt, signaling a larger all-in obligation for a buyer and often a higher risk profile. In such cases, valuation multiples like EV/EBITDA can expose how leverage changes the “true cost” of cash flows vs a debt-free peer even when market caps look similar.
- Large cash pile, little or no debt: A company with substantial net cash will have EV below market cap, and in extreme cases EV can even turn negative when cash exceeds debt plus market cap, indicating the market values the operating business at less than its cash holdings. This situation can occur in cash-rich sectors or after asset sales, and it calls for deeper analysis of why the market discounts the operations so steeply.
- Share price jumps, balance sheet unchanged: If the share price rises, market cap rises one-for-one, so EV rises too, but only by the change in market cap because net debt is the same, keeping the difference between EV and market cap unchanged in the short term. This shows how EV and market cap can move together on price action, while their gap reflects balance sheet structure.
- Debt paydown from free cash flow: When a company uses cash to reduce debt, net debt falls, so EV\text{EV}EV declines even if market cap has not yet reacted, compressing EV-based multiples like EV/EBITDA and potentially setting up an equity re-rating if operating performance is steady. EV’s sensitivity to net debt makes balance sheet progress visible in valuation even before the stock price catches up.
- Debt-funded buybacks: Issuing debt to repurchase shares can lift the share price and market cap, but EV often rises more because debt increases and cash decreases, pushing EV\text{EV}EV higher by the net change in debt minus cash. This illustrates that financial engineering can boost equity value while making the whole enterprise more leveraged, which EV will reveal directly.
- Acquisition using cash and new debt: For the acquirer, taking on debt and spending cash to buy a target increases EV because debt goes up and cash goes down, while for the target, EV approximates the price a buyer must pay regardless of how that price is financed. EV’s “capital-structure neutral” lens lets analysts compare pre- and post-deal business value without confusing equity-only effects.
- Two similar hotels, different leverage: If Hotel A has a lower market cap than Hotel B but carries significant debt, its EV can exceed B’s EV, making B the cheaper whole-business purchase despite A’s lower equity price, as illustrated in classic comparisons of like-for-like assets. Investors using EV/EBITDA on both hotels would see the leveraged one screen more expensively once debt is considered, even if market caps suggest the opposite.
How professionals use EV?
EV enables apples-to-apples comparisons across firms with different debt and cash by pairing it with operating metrics like EBITDA and revenue in ratios such as EV/EBITDA and EV/Sales. Because it aims to reflect the business value independent of today’s financing mix, EV is a primary tool in comparable company analysis and M&A valuation work.
Practical takeaways
Always check EV alongside market cap so you see both the equity market’s view and the all-in value including debt and cash.
Use EV-based multiples to compare companies with different leverage, and remember that big cash balances lower EV while big debts raise it, sometimes flipping conclusions you would draw from market cap alone.
Negative EV usually flags a large net cash position and a market that’s discounting the operating business, which merits deeper due diligence rather than a snap judgment.
For M&A, EV is closer to what a buyer actually pays for operations, so it belongs at the center of any whole-business valuation discussion.
This article is for informational purposes only and should not be considered financial advice. Investing in stocks, cryptocurrencies, or other assets involves risks, including the potential loss of principal. Always conduct your own research or consult a qualified financial advisor before making investment decisions. The author and publisher are not responsible for any financial losses incurred from actions based on this article. While efforts have been made to ensure accuracy, economic data and market conditions can change rapidly. The author and publisher do not guarantee the completeness or accuracy of the information and are not liable for any errors or omissions. Always verify data with primary sources before making decisions.