Valuation Measures

Market Capitalization (Market Cap) is the current market value of all the outstanding shares of a company. Market cap is computed as the total outstanding shares multiplied by the current price so market cap changes each time the price of the stock changes.

Investors use market cap as a measure of the size of a company. A company is classified as large cap (market cap greater than $5 billion), mid cap (market cap between $1 and $5 billion) or small cap (market cap less than $1 billion). Note: Different investors use different dollar limits to classify companies.

Enterprise Value is the real or economic value of a company. It includes the market value of the outstanding stock and net debt. When a company is acquired, the purchaser buys all the stock and assumes all the debt. The acquirer also gets any cash and other investments (stocks, bonds) the company has. The acquirer can use these assets to offset the debt. Therefore, the enterprise value is computed as

Enterprise value = Market Cap + Debt - Cash - Investments.

Price-to-Earning's Ratio (P/E) is the stock price divided by its earnings (current, trailing or future).

Related Articles:

Estimating a Stock's Future Price Using Earnings and P/E
Estimating Future Prices
Price-to-Earnings Ratio

Updated July 26, 2007.