MarketLearn
Chapter 28Advanced~9 min

Comparing different capital structures

EV lets you compare operations regardless of borrowing.

Capital structure describes how a company funds itself: how much comes from equity (owners) and how much from debt (borrowers). Two companies can run similar operations but choose very different mixes.

Market cap alone penalises companies that use debt, because debt sits outside the equity value. Enterprise value deliberately includes debt, so it lets you compare the operating businesses more fairly.

Company (fictional)Market capDebtCashEnterprise value
Deccan Motors Ltd₹4,000 Cr₹1,500 Cr₹200 Cr₹5,300 Cr
Pinnacle Paints Ltd₹5,200 Cr₹100 Cr₹900 Cr₹4,400 Cr

The company with the smaller market cap can have the larger enterprise value once debt is included.

If you wanted to compare how expensive these two businesses are, you would normally look at enterprise value rather than market cap, because EV reflects the cost of the whole business regardless of how it is financed.

Enterprise value ≈ Market cap + Total debt − Cash

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.
Try setting two companies to the same market cap but different debt levels. Notice how enterprise value changes even though the equity value did not.
Enterprise value makes the comparison of operations fairer, but it does not make debt harmless. A heavily indebted company still faces real obligations: interest must be paid, and that raises risk for owners.
Use EV to compare businesses; use market cap to talk about what the shares cost. Keep both in view.

Key takeaways

  • Capital structure is the mix of debt and equity a company uses.
  • Market cap values equity only; EV includes debt and nets off cash.
  • EV allows fairer comparison of businesses with different borrowings.
  • A higher EV is not automatically better or worse — and debt still carries risk.

Check your understanding

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

Question 1 / 30%

Company X: market cap ₹3,000 Cr, debt ₹1,200 Cr, cash ₹200 Cr. Company Y: market cap ₹3,500 Cr, debt ₹300 Cr, cash ₹0. Which has the higher enterprise value?

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