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Enterprise Value vs. Market Cap: Simply Explained

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The Daily Ledger · Markets

Acquirers analyzed the target’s enterprise value rather than market cap to factor in its underlying debt burden.

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Overview

Market cap is the price of a company's shares — share price times number of shares. Enterprise value (EV) measures what owning the whole business would effectively cost: you buy the shares, you take responsibility for its debt, and its cash becomes yours, offsetting part of the bill. EV = market cap + debt − cash.
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Overview

Market cap = the price of the shares. Enterprise value = the shares, plus the debt you're inheriting, minus the cash in the drawer. One is the check you write; the other is what owning the thing actually costs. 😎

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Detail

Market cap only prices the equity, but taking over a company involves more than the check to shareholders. The debt isn't paid to the sellers; it stays on the books and becomes the new owner's problem, so it belongs in the true cost, while the company's cash comes with the keys and covers part of that debt, so it's subtracted. A concrete pair: Company A has a $10B market cap, no debt and $2B cash, so EV is $8B, while Company B has the same $10B market cap but $15B of debt and $1B cash, so EV is $24B. Same market cap, and B costs three times more to own. That's why acquirers, lenders and analysts compare companies on EV, with ratios such as EV/EBITDA, instead of market cap.
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Detail

The math: EV = market cap + debt − cash. Debt gets ADDED because nobody hands you the loans in an envelope — they're just quietly yours now, waiting to be repaid. Cash gets SUBTRACTED because it comes with the keys and can knock out part of that debt on day one. Party trick: two companies can wear the same $10B market cap while one truly costs $8B to own and the other $24B — same shirt, very different receipts. That's why pros price deals in EV and compare on EV/EBITDA. Market cap can't tell a debt mountain from a cash pile. 😎

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Analogy

Buying a taco truck business: the check you write the owner is $10,000 — that's the market cap, the price of the ownership papers. But the truck still owes the bank $15,000 (your problem now) and there's $2,000 in the register (yours now too), so owning it costs $10,000 + $15,000 − $2,000 = $23,000. A buyer who only looks at the check meets enterprise value the day the bank calls about their loan.
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Analogy

Swiping right on "owns a Tesla": that's the market cap, the shiny visible part. Enterprise value is the full disclosure — the Tesla, PLUS the $700-a-month loan it rides on, MINUS the $4k in their savings account. Two matches can flex the same car while one is quietly worth a used bicycle; date the EV, not the market cap.
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AI explanations may contain errors · Not professional advice

Formal definition — The same term, explained the usual way

Market capitalization is the aggregate market value of a company's outstanding equity, computed as share price multiplied by shares outstanding. Enterprise value augments market capitalization with total debt and other non-equity claims and deducts cash and cash equivalents, yielding a capital-structure-neutral measure of the cost of acquiring the entire business. Enterprise value is accordingly the standard basis for acquisition pricing and for valuation multiples such as EV/EBITDA.

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