Market cap and enterprise value are both "how much is this company worth" answers, but they answer it for two different buyers — one buying just the equity, one buying the whole business including its debts and cash.
The formulas
Why debt gets added
If you acquire a company, you typically inherit its debt along with its assets — so the true cost of the acquisition includes paying off (or assuming) that debt on top of buying out the shareholders. Market cap alone understates the real cost of a leveraged company.
Why cash gets subtracted
Cash on the balance sheet effectively reduces the net cost of acquisition, because the acquirer can use the target's own cash to help fund the deal (or simply account for it as an asset received). This is why a cash-rich company can have an enterprise value significantly lower than its market cap.
A worked example
A company has a $500M market cap, $150M in debt, and $80M in cash:
The $500M market cap alone would understate what it actually costs to acquire the whole business by $70M.
When EV and market cap diverge most
Highly leveraged companies (private equity-backed, capital-intensive industries) show EV well above market cap. Cash-rich, low-debt companies (many mature software businesses) can show EV below market cap — sometimes substantially, if the company holds a large cash reserve relative to its size.
Why valuation multiples use EV, not market cap
EV/EBITDA and EV/Revenue multiples use enterprise value specifically because it's capital-structure neutral — it lets you compare a heavily-indebted company to a debt-free one on an apples-to-apples basis, since both are valued as the whole operating business regardless of how it's financed.
Frequently asked questions
Can enterprise value be negative? Rarely, but yes — if cash exceeds market cap plus debt, which can happen for a company trading well below its cash balance. It's an unusual signal worth investigating rather than taking at face value.
Which figure should I use to compare two companies' size? Enterprise value is the more accurate comparison for operating business size, since it isn't distorted by differences in how each company is financed.
Use the Enterprise Value Calculator to compute EV from market cap, debt, and cash, and convert between EV and equity value.