I recently filled in a survey for one of my online brokers, who to show their gratitude gave me three months free trial of an Australian investing newsletter.

As this quote from one of their articles today made me chuckle, I decided I should take a minute to cover the difference between market capitalisation, enterprise value and share price.

OZ, at a share price of 93.5¢ at the close on Friday, is capitalised at $2.9 billion. Equinox, at $2.79, is capitalised at $1.9 billion.
That $1 billion gap is either the infamous “African discount”, which hurts all Australian companies working in a risky continent, or it’s the debt being carried by Equinox.

Company	OZ Minerals	Equinox
Market Cap	$2.92 billion	$1.95 billion
Cash	$1.1 billion	$900 million
Debt	nil	$800 million

My intelligent and gorgeous wife once told me we should sell company A, which we owned, and buy company B as they were the same price and company B was clearly worth more. My interest was peaked; however, the great opportunity was a mirage, as she was only looking at the share price and that does not tell you the price tag on a company.

Market capitalisation is the next step along the path to price and is easily obtained from most financial sites or simply by multiplying the shares outstanding by the current share price. However, like the quoted price it really tells you very little and as the quote above highlights can actually be rather deceiving.

Walking further along the path we get to enterprise value (EV). EV is the price the market is currently placing on a company. It is the market capitalisation minus cash plus debt. Using the data in the table above illustrates why enterprise value in an important concept. Oz Minerals has a market capitalisation of $2.92B, but if you could buy all the shares at the current price you’d also get $1.1B in cash, so your total net cash outlay or enterprise value would be $1.82B. While the market capitalisation of Equinox at $1.95B is actually lower than Oz Mineral’s, if you bought Equinox you’d only get net cash of $100M ($900M cash minus $800M debt) for a EV of $1.85B. Poof! There goes the $1B gap. Just like share price, the market capitalisation is a component of a companies price, but is not the full story.

For something different; here I am in Ireland.

My bigger problem with the quote is the entire premise. It’s like saying there is a $400k price gap between a Ferrari and Toyota due to the infamous “Japanese discount”. There is a price gap between the two cars as they have different values and car drivers have different perceptions of their values. Swapping back to the miners, while there is negligible gap in the real price or EV of the two the article does go on to present an excellent case for why Equinox is comparatively undervalued. It assets have a longer life and it should earn substantially more over the years. Yes, there may be an “Africa discount”, but that is not shown by comparing market capitalisation or EV.

To summarise, the share price is what you pay per share, market capitalisation is what you’d pay for all the shares if they were available at the current price and enterprise value is what it would actually cost you, i.e. you initial cash outlay less cash in the coffers plus debt. Value is another kettle of fish altogether.

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1. Australian Share Market Performance and Returns
2. Beating the Market – Valuation Tips
3. Great Southern Saga Continues
4. Australian Share Market Returns and Equity Premiums
5. Investing 101 – Price and Value
6. MMC Contrarian Share Buy Back