What is MARKET CAP?
Market Cap is like figuring out the total price of all the LEGO bricks that make up a giant LEGO castle. It's the total value of all the company's shares of stock. It tells you how big a company is based on what people are willing to pay for its stock.
What is ENTERPRISE VALUE?
Enterprise Value is like figuring out the total cost of buying that LEGO castle, including not just the bricks, but also paying off any money the LEGO company borrowed to buy the bricks in the first place. It's a more complete picture of what it would really cost to own the whole company.
Key Differences
- Debt: Market Cap doesn't show you how much money a company owes. Enterprise Value does.
- Calculation: Market Cap is simple: shares times price. Enterprise Value is a bit more complicated: Market Cap + Debt - Cash.
- Purpose: Market Cap is for quick comparisons. Enterprise Value is for figuring out if a company is a good buy.
- Cash: Enterprise value considers the cash a company has on hand. If a company has a lot of cash, that can offset some of its debt, making it more attractive.
When to Use Each One
Let's say you want to see if Nike is bigger than Adidas. You can quickly compare their Market Caps to get a general idea. But if you're thinking about buying all of Adidas, you'd want to use Enterprise Value to see how much it would REALLY cost, including paying off any debts they have.
The Bottom Line
Market Cap is your quick and easy way to compare the size of companies. Enterprise Value is your way to find out the true cost of buying a company, including its debts and cash. Think of it like this: Market Cap is the price tag on the toy, while Enterprise Value is the price tag PLUS the cost of batteries and any money you owe on the toy!