Market cap vs enterprise value
Market cap is share price times shares outstanding. Enterprise value is equity plus net debt. A $50 share on 100,000,000 shares is a $5,000,000,000 cap. A different sheet with $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash has EV of $130,000,000.
| Market capitalisation | Enterprise value | |
|---|---|---|
| What it prices | The residual claim. | The operations, before asking who funded them. |
| P/E teaching sheet | $50 times 100,000,000 shares is $5,000,000,000. P/E 20 on $250,000,000 of earnings. | Not this sheet. Do not paste a debt line onto this share count. |
| EV teaching sheet | Equity value $100,000,000, which is the claim EV starts from. | Plus $40,000,000 of debt minus $10,000,000 of cash: EV $130,000,000. Net debt $30,000,000. EV/EBITDA 13. |
| Cash zeroed on the EV sheet | Equity is still $100,000,000. | EV becomes . Net debt is the full $40,000,000. |
| Smaller P/E sheet | $80 times 50,000,000 shares is $4,000,000,000. P/E 32. | Still a different firm from the EV sheet. |
| When you would pick it | An equity multiple: P/E, earnings yield. | An operations multiple: EV/EBITDA, a firm DCF. |
On this page
Two claims, two teaching sheets
Market cap on the P/E sheet is $5,000,000,000. Enterprise value on the EV sheet is $130,000,000. Those are different firms. How market capitalisation works owns price times shares. How enterprise value works owns equity plus net debt. Enterprise value against equity value is the EV sheet's own pair.
Lining a $5,000,000,000 cap up next to a $130,000,000 EV as if they were one name is how a multiple gets a denominator from the wrong claim.
Debt is in one numerator and not the other
EV/EBITDA has debt in the numerator and a pre-interest denominator. P/E does not. On the EV sheet, zeroing cash lifts EV from $130,000,000 to . On the P/E sheet, raising EPS from $2.50 to leaves the $5,000,000,000 cap still and cuts P/E from 20 to 10. This is educational material, not financial advice.
Worked examples
The P/E sheet cap
Price $50, EPS $2.50, shares 100,000,000. What is market cap?
- Market cap $5,000,000,000.
- Earnings $250,000,000. P/E 20.
Market cap is $5,000,000,000. Earnings are $250,000,000. P/E is 20. This is not the EV teaching sheet.
The EV sheet
Equity $100,000,000, debt $40,000,000, cash $10,000,000, EBITDA $10,000,000. What is enterprise value?
- Net debt $30,000,000.
- EV $130,000,000. EV/EBITDA 13.
Enterprise value is $130,000,000. Net debt is $30,000,000. Equity value is $100,000,000. EV/EBITDA is 13. This is not the P/E teaching sheet.
The smaller P/E sheet
Price $80, EPS $2.50, shares 50,000,000. What is market cap?
- Market cap $4,000,000,000.
- Earnings $125,000,000. P/E 32.
Market cap is $4,000,000,000. Earnings are $125,000,000. P/E is 32. Still a different firm from the EV sheet.
Common questions
Can I add net debt to the \$5,000,000,000 cap?
Only if that cap and that net debt are one firm. On this site they are two teaching sheets. Do not paste them.
Which one does a firm DCF price?
Enterprise value. Unlevered free cash flow is the operations. Mixing that DCF with market cap prices the debt twice, or not at all.
Is a bigger cap a better firm?
It is a larger equity claim at today's price. This is educational material, not financial advice.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.