What is Market Capitalization (Market Cap)?
Market Capitalization (Market Cap), is the amount of money required to buy out an entire company at its current market price. It is computed as market price per share of the company multiplied by total number of outstanding shares.
For instance, a company which has issued 1 Lakh shares and currently trades at Rs. 30 which is the Current Market Price would have Market Cap of Rs. 30 Lakh (1 Lakh * Rs. 30). With change in equity prices, market capitalization of the companies keeps changing.
Traded stocks are mostly classified by Market Cap.
* Blue-chip stocks represent the largest companies by market cap. The given large size of their market cap, they attract a large number of investors both institutional and retail and utilize a high level of liquidity. These are also called large cap stocks.
* Mid cap stocks refer to those companies which enjoy a good level of liquidity but are medium in terms of market cap size.
* Small cap stocks are those stocks that are smaller in size and for that reason does not enjoy much liquidity.
There is no exact size for the cut-off of large, mid or small cap stocks. It is for that reason common to consider the top 50 to 100 stocks by market capitalisation as large cap, the next 200 to 500 stocks as mid cap, and the remaining all as small cap stocks.
Market cap is also used as an indicator of the size and significance of the stock market of a country. The ratio of market cap to GDP of a country is a pertinent measure for the reason.
What is Enterprise Value?
Enterprise Value (EV) is the notional takeover price of a firm. Besides Equity, it considers the debt as well as cash reserves of the company in formatting its value.
It is absolutely assumed that the debt of the company is a liability that also has to be taken over and accounted for in the price by the acquirer, despite the fact that the cash reserves are available to the buyer and consequently deducted from the total value.
EV may be defined mathematically as mentioned below:
Enterprise value = Market capitalization – cash and cash equivalents, where the Market capitalization is the "Market value of equity Market value of debt"
Market Capitalization is derived by just multiplying the market price with the number of outstanding equity shares.
Market value of debt is in general taken as outstanding debt on the balance sheet of the company.
This cost is limited by any cash or cash equivalents on the balance sheet which will be available to pay out debts of business. This is the price of the entire firm to a buyer.
For instance, let us calculate EV of a company with the information below:
Market Cap = 20 Lakh
Total Debt = 3 Lakh
Cash = 4 Lakh
Subsequently, EV = 20 Lakh + 3 Lakh – 4 Lakh = 19 Lakh