Enterprise value and market capitalization (also known as market cap) each measure a company's market value. The two calculations are not identical, and the terms are certainly not interchangeable. However, each offers a peek at a company's overall value and a way to compare similar companies. These numbers are also helpful in determining a fair price to pay for shares of a particular company.

Market Capitalization: A Simplified Valuation Method

Market capitalization is the most simplified way to calculate a company's size, value and, consequently, its growth and risk outlook. This measurement assesses the value of a business based purely on stock. The calculation is a multiple of the stock's current share price and number of shares outstanding.

Enterprise Value: A More Accurate Valuation

Market capitalization omits important factors in the overall valuation of a company.

For example, if a company were to be purchased, market capitalization would only reflect the cost to acquire the outstanding equity. In reality, the new owner would also become responsible for all outstanding debt.

Source : Investopedia

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