Lesson 1 of 6
Enterprise value against market cap
Market cap prices the equity. Enterprise value prices the whole business, funded by everybody who has a claim on it, debt included.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Market capitalisation is the price of the equity. Enterprise value is the price of the whole business.
- The bridge is one line: enterprise value equals market cap, plus debt, less cash.
- Two companies with the same market cap and the same operating profit can be priced far apart on this measure once debt is added in.
Buying every share of a company does not make its debt disappear. Enterprise value prices the business as a whole, funded by lenders and shareholders both, while market capitalisation prices only the shareholders' slice of it.
From market cap to enterprise value
- Market capitalisation$1,000
- Plus total debt+$400
- Plus preferred stock+$50
- Plus minority interests+$30
- Less cash−$120
- Enterprise value= $1,360
Why add debt and subtract cash
Debt is added because the buyer inherits it. Acquire every share of a company that owes 400 and you now own a business that owes 400. Cash is subtracted because it belongs to the company but is not part of its operations. The rule behind both: enterprise value prices the operations in a way that does not depend on how they happen to be funded.
Minority interests and preferred stock belong in the bridge for the same reason as debt: each is a claim on the business that market cap alone does not count.
Same profit, same market cap, different price
On earnings the two look 20 percent apart. On an enterprise basis, the gap is 53 percent, because interest already shrank Company B's earnings while the debt itself never showed up in the price. A screen built only on price to earnings understates how much more Company B's business costs.
Where the same bridge counts twice
A lease rule named ASC 842 (Accounting Standards Codification Topic 842, effective for public companies in fiscal years beginning after 15 December 2018.) put operating leases on the balance sheet as a liability, but EBITDA (operating profit before depreciation and amortisation) already carries the rent as an operating expense. Add the lease liability to debt without adding the rent back to EBITDA and the same obligation is charged twice, once in the numerator and once in the denominator. That inflates the multiple for every retailer, restaurant chain and airline being compared.
Which cash, and why it is a choice
Subtracting all of a company's cash assumes every dollar is spare. No operating business runs on a zero balance: payroll clears and suppliers are paid on terms, so a working float sits there permanently. Take a company holding 120 of cash, of which only 40 is genuinely distributable. Subtracting the whole 120 prices the business as if it could be emptied out; subtracting the 40 that is actually spare prices it as a business that keeps running. Both are defensible, and they are different numbers. Most data sources subtract all of it. Whichever you use, say which.
Do it on a real 10-K
- Take total debt, including the current portion of long-term debt, from the balance sheet.
- Take preferred stock and non-controlling interests from the same statement.
- Take the operating lease liability and total lease cost from the lease note, and decide, in writing, whether the liability goes into debt with the rent added back to EBITDA, or both stay out.
- Take restricted cash from the cash note; it is left out of the cash subtracted from debt.
Check yourself
A company has a market cap of 1,000, debt of 400 and cash of 100. What is its enterprise value?
- 500
- 1,300
- 700
Show the answer
Answer: B.
1,000 plus 400 less 100 is 1,300. Debt is added because the buyer inherits it, cash is subtracted because it is not part of the operations.Company B above looks 20 percent dearer than A on price to earnings and 53 percent dearer on enterprise value. Why the difference?
- B pays more tax
- B's debt is a claim on the business that market cap leaves out
- Operating income is measured differently
Show the answer
Answer: B.
Price to earnings sees only the equity. Enterprise value adds B's 400 of debt, which is what the business really costs.Under ASC 842, adding the operating lease liability to debt without any other change to the ratio does what?
- Nothing, the two adjustments cancel
- Counts the same lease obligation twice
- Corrects a distortion in EBITDA
Show the answer
Answer: B.
EBITDA already carries the rent as an operating expense. Adding the lease liability to debt as well double counts the same obligation unless the rent is added back to EBITDA too.Sources
- ASC 842, Leases.
- ASC 810, Consolidation, on non-controlling interests.
What this leaves out
- Debt is counted at book value here, a poor stand-in for a company whose bonds trade well below par.
- Market cap moves with every price tick; every price behind this bridge was last stored 2026-08-26.
- Enterprise value is withheld for banks, insurers, capital markets firms and mortgage REITs rather than shown as a meaningless number.
- Nothing here is advice about any security.