Why Smart Investors Use Enterprise Value Instead of Market Cap

Buying a company is like buying a used car—if there’s cash in the trunk, your real cost drops. That’s the core idea behind enterprise value (EV).

Market cap only tells half the story. It’s what the stock market prices the company at, but it ignores two critical factors: debt and cash. When you actually acquire a company, you’re taking on all its debt AND getting to keep its cash. So the true acquisition cost is:

EV = Market Cap + Total Debt − Cash

Why This Matters

EV becomes really useful when comparing companies using ratios like EV/EBITDA. Say two tech companies both trade at 15x P/E (price-to-earnings), but one is drowning in debt while the other has tons of cash. The EV metric catches that. One might be 12x EV/EBITDA (cheap), the other 20x (expensive)—totally different stories.

Quick example: Company worth $10B on market cap, $5B in debt, $1B cash = $14B enterprise value. If it makes $750M in EBITDA, the EV/EBITDA multiple is 18.6x. For software? That’s a steal. For retail? That’s pricey.

The Catch

EV has a blind spot: it doesn’t tell you if that debt is being managed well or if it’s choking the company. In capital-heavy industries (manufacturing, oil & gas), high EV can be misleading because heavy equipment costs inflate the number artificially.

Bottom line: Always compare companies against their industry average. EV is powerful, but context is everything.