Which One Is Better, Market Capitalization or Enterprise Value?

Halal Investment Series Part 13

Enterprise Value or Market Capitalization, both are ways to measure the value of a company. Some consider EV to be a better metric than Market Cap to find the value of a company. Enterprise Value takes into account the market value as well as the total debt of the company in its formula to give the company a more accurate valuation. During a potential takeover, a company is evaluated using EV because debt is included in the equation.

Market Capitalization

Market capitalization is the total value of all outstanding shares of a company’s stock. You can calculate It by multiplying the current share price of the stock by the number of shares outstanding. The figure is one of the key statistics that appear alongside each stock listed on a financial news or broker’s website.

For instance, if XYZ stock is trading at $14 per share and there are 2 million shares outstanding, the market capitalization is $28 million.

Market capitalization can also give you an idea of how much growth and risk you can expect from a specific stock. Analysts categorize the companies based on their market capitalization. Large-cap, mid-cap, and small-cap are the three broad categories. In general, large-cap companies are well-established successful businesses with consistent revenue streams. Their development may be slow but steady over time. Their price fluctuations are less erratic than those of smaller companies.

Is Enterprise Value (EV) Better?

Market capitalization demonstrates that a company’s share price alone tells you very little about its overall value. Simply because a stock has a high share price does not imply that the company is worth more.

In the overall valuation of a company, market capitalization omits some important facts. Most importantly, it does not account for the company’s debt. Because it considers debt obligations, enterprise value is a more accurate measure of a company’s true worth.

You can calculate EV by adding the company’s market capitalization to its outstanding preferred stock and all debt obligations, then subtract all cash and cash equivalents.

Which One Is Better, Market Capitalization or Enterprise Value? Enterprise Value gives the investor a better holistic view of a company.

You can view specific details on a stock on the Musaffa Platform

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