Two companies each earn ₹500 crore of operating profit, and each has a market capitalisation of ₹5,000 crore. On any measure built from the share price they look like twins. One of them carries ₹4,000 crore of borrowings and almost no cash; the other has no debt at all and ₹800 crore sitting in fixed deposits. Buying the whole of the first would cost you a great deal more than ₹5,000 crore, because the debt comes with it and has to be serviced or repaid.
A flat is advertised at ₹40 lakh. Partway through the conversation the seller mentions that ₹30 lakh of a home loan is still outstanding against it, and the sale can only go through once that is cleared. The real price of owning the flat outright is ₹70 lakh. Nobody would set that flat beside an unencumbered ₹40 lakh flat in the next building and call them equally priced.
Market capitalisation is the ₹40 lakh — the price of the equity as advertised. Enterprise value is the ₹70 lakh — the price of the whole asset, regardless of how it happens to be financed. Which of the two you use decides whether a comparison means anything at all.
Market capitalisation: the price of the equity
- Share price
- The last traded price of one share
- Shares outstanding
- Every share currently in existence, promoter-held and public alike
Example: This is what it would cost to buy every share, ignoring the fact that a buyer of the whole company would also inherit its borrowings and its cash. For a company with no debt and no spare cash, market capitalisation and the price of the business are the same thing. Very few companies are like that.
Enterprise value: the price of the business
- Total debt
- Short-term and long-term borrowings from the balance sheet; most analysts also add the lease liabilities that now sit there, so check what a published figure has included before comparing it with your own
- Cash and equivalents
- Cash, bank balances and liquid investments a buyer could use immediately to repay debt
Example: A fuller version also adds minority interest and preference capital, because a buyer would have to settle those claims too. For a first pass, market capitalisation plus debt minus cash is close enough to be useful and simple enough to do in your head while reading.
Build enterprise value from the share price, debt and cash, and see how EV/EBITDA and P/E can tell different stories about the same company.
Which multiple belongs where
| Multiple | Built on | When it is the honest one |
|---|---|---|
| P/E | Market capitalisation and net profit | Comparing companies with broadly similar debt; simple, and it is what everybody quotes |
| EV/EBITDA | Enterprise value and operating profit before depreciation | Comparing companies whose borrowings differ, and capital-heavy businesses where depreciation policies differ |
| EV/Sales | Enterprise value and revenue | Businesses not yet profitable, where an earnings multiple has no usable denominator |
| P/B | Market capitalisation and book value | Banks and financial companies, where the balance sheet is the business |
Free float: the part actually for sale
Not every share can be bought. Promoters hold a large block in most Indian companies, and government holdings in public sector undertakings are larger still. The portion genuinely available in the market is the free float. Indian indices are weighted on free-float market capitalisation rather than total market capitalisation, so a company where the promoter holds three-quarters of the shares carries far less weight in an index than its size alone would suggest.
Company X: market capitalisation ₹2,000 crore, debt ₹1,500 crore, cash ₹100 crore, EBITDA ₹400 crore. Company Y: market capitalisation ₹3,000 crore, no debt, cash ₹500 crore, EBITDA ₹400 crore. Which is more expensively priced?
Flat ka rate ₹40 lakh bataya, phir pata chala ki uspe ₹30 lakh ka home loan chadha hai jo clear karna padega. Asli daam ₹70 lakh hai. Market cap woh ₹40 lakh hai — sirf shares ka daam. Enterprise value woh ₹70 lakh hai — poore dhande ka daam, karza jod ke aur cash ghata ke. Do companies ka comparison EV se hi imaandaar hota hai.
- Market capitalisation prices the equity; enterprise value prices the whole business.
- Enterprise value = market capitalisation + total debt − cash. Net debt is the bridge.
- Negative net debt means the enterprise is cheaper than the shares suggest.
- Use EV-based multiples whenever the companies being compared carry different borrowings.
- Free float is the part actually available to trade, and it drives index weights and liquidity.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- enterprise value meaning
- Enterprise value is the price of the whole business regardless of how it is financed — market capitalisation plus net debt (borrowings minus cash). It reflects what buying the entire company would actually cost, because a buyer inherits its debt and gets the benefit of its cash. It is the fairer basis for comparing two companies with very different levels of borrowing.
- market capitalisation is calculated as
- Share price multiplied by the total number of shares outstanding, counting both promoter-held and public shares. It is what it would cost to buy every share at the current price, but it ignores the borrowings and cash a buyer of the whole company would also take on — which is why enterprise value exists.
- difference between market cap and enterprise value
- Market capitalisation is the price of the equity alone; enterprise value is the price of the entire business, adding net debt to market cap. Two companies with the same market cap can have very different enterprise values if one is loaded with debt and the other holds cash, which is why multiples built on EV are more comparable than those built on the share price.
- free float meaning in stock market
- Free float is the portion of a company’s shares that is actually available for public trading — total shares outstanding minus promoter, government and other locked-in holdings. A low free float means fewer shares change hands, which can make the price more volatile and is why major indices weight companies by free-float market capitalisation rather than total market cap.