MarketLearn
Chapter 28Advanced~10 min

Market cap is not the whole story

EV adds debt and subtracts cash to value the whole business.

Market capitalisation is the value of a company's shares: share price × number of shares. But it is only one part of the business. It ignores how much the company has borrowed and how much cash it holds.

If you were to buy the entire business, you would pay for the shares and also take responsibility for its debt — but you would gain control of its cash. Enterprise value (EV) captures that full picture.

Enterprise value ≈ Market cap + Total debt − Cash & equivalents

Why subtract cash? Because the buyer of the whole business effectively gets the cash, which offsets part of what they paid. Why add debt? Because the buyer must deal with the debt, so it adds to the true cost of owning the business.

Market cap
What the equity is worth
Total debt
Borrowings the business owes
Cash
Money the business holds
Enterprise value
The full cost of owning the business
Company (fictional)Market capDebtCashEnterprise value
Coastal Cements Ltd₹5,000 Cr₹800 Cr₹300 Cr₹5,500 Cr
Zenith Software Ltd₹5,000 Cr₹0 Cr₹2,000 Cr₹3,000 Cr

Same market cap, very different enterprise value.

Enterprise Value (EV)

What it would cost to buy the whole business and take on its debt.

EV ≈ Market Cap + Total Debt − Cash

Enterprise Value

₹5,300 Cr

Net Debt

₹300 Cr

Two companies with the same market cap but different debt loads are not equally priced. EV accounts for that, which is why it is useful when comparing companies with different capital structures.
Two companies can have the same market capitalisation yet be very different businesses to buy. The cement maker carries debt; the software firm holds a large cash pile.
EV is an estimate, not a precise price. Cash and debt figures are read from the most recent financial statements and change over time. Minority interests and other items can complicate the simple formula.
Market cap tells you what the equity costs. Enterprise value tells you what the business costs. They answer different questions.

Key takeaways

  • Market cap = share price × number of shares; it values only the equity.
  • EV ≈ market cap + total debt − cash.
  • Debt raises the cost of owning the whole business; cash offsets it.
  • Two companies can share a market cap but differ in EV.

Check your understanding

Every answer comes with an explanation — the goal is understanding, not a score.

Question 1 / 40%

A company has a market cap of ₹4,000 crore, total debt of ₹900 crore and cash of ₹400 crore. What is its enterprise value?

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