Both measures are useful in evaluating a company’s financial health, but they provide different perspectives on a company’s value. Understanding the distinction between Market Caps and Enterprise Values can help you make informed purchasing decisions that are aligned with your investment goals.

Market Cap, also known as market capitalization, is the total value of the company’s outstanding shares on the stock exchange. It doesn’t consider the company’s debt, and therefore it can provide an inaccurate impression of the value of a company’s total worth. Enterprise Value is, on the other hand is a way to add a company’s debt to its equity, and subtracts its cash balance to provide a more complete picture of a company’s value.

By adding a company’s debt, it gives you an idea of the firm’s financial obligations that have to be paid over time, and its capacity to invest in growth opportunities and pay dividends to shareholders. In the same way, subtracting a company’s cash will give you an idea of its liquidity – the amount of cash it has in its bank.

The EV/MarketCap ratio provides a quick and easy way to determine the potential investment. However it’s not an alternative to due diligence or financial modeling. Additionally the EV to Market Cap ratio is not an appropriate measure of a VDR providers firm’s value to its competitors, since it fails to take into account variations in the firm’s distinct capital structures and risk profiles.