Market Capitalization: What It Means for Investors

how to calculate market capital

Market cap can be a valuable tool for investors watching stocks and evaluating potential investments. Market capitalization is a quick and easy method for estimating a company’s value by extrapolating what the market thinks it is worth for publicly traded companies. In an acquisition, the market cap helps determine whether a takeover candidate represents a good value to the acquirer. Companies with a market capitalization between $250 million and $2 billion are commonly classified as small-cap companies.

Because of their growth orientation, they may be riskier since they spend their revenues on growth and expansion. Small-cap stocks are therefore often more volatile than those of larger companies. Generally, large-cap stocks experience slower growth and are more likely to pay dividends than faster-growing, small- or mid-cap stocks.

Types of Market Capitalization

An understanding of the market cap concept is important for not only the individual stock investor but also investors of various funds. Market caps can help investors know where they are putting their hard-earned money. Outstanding shares are the total amount of shares currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. Market cap is often used as a baseline for analysis as all other financial metrics must be viewed through this lens. For example, a company could have had twice as much revenue as any other company in the industry.

Market Capitalization (Market Cap) is the most recent market value of a company’s outstanding shares. The Market Cap is equal to the current share price multiplied by the number of shares outstanding. A high market cap signifies that the company has a larger presence in the market. Larger companies may have less growth potential than start-up firms, but established companies may be able to secure financing cheaper, have a more consistent stream of revenue, and capitalize on brand recognition. For making money in stocks, it is crucial you do not buy at an overvalued price.

But since we have switched the sign convention when linking to the hard-coded values, we can just add the two cells. Otherwise, if the company is private – i.e. if its shares of ownership are not publicly traded on the stock markets – the value of its equity should be referred to as equity value instead. Market cap or market capitalization in crypto results from multiplying the number of coins that exists by the price at that moment. Imagine there are one million coins, and the cost of one crypto token is $10, then its market cap equals $10 million. Suppose we’re tasked with calculating the market capitalization and the enterprise value of three different companies that operate in the same (or adjacent) industry. For privately held companies, this particular approach is the only viable method to compute equity value, as these companies do not have a readily available public share price.

  1. Shares are often over- or undervalued by the market, meaning the market price determines only how much the market is willing to pay for its shares.
  2. The simplest calculation of enterprise value is market capitalization plus net debt.
  3. A company with a Market Cap (equity value) of $10 billion and debt of $5 billion has an Enterprise Value of $15 billion.
  4. Track records of such companies aren’t as long as those of the mid-to-mega-caps, but they also present the possibility of greater capital appreciation.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Let’s analyze an example of a company that has been on the market for a few years. We’re aiming to determine whether it’s a large-cap, medium-cap, or small-cap company. Frequently, equity analysts and investors following the public equities market will describe companies using industry jargon, such as “large-cap”, “mid-cap,” or “small-cap”. After linking the enterprise values for each company from the prior steps, we’ll subtract net debt amounts this time around to arrive at the market value of equity. Despite their identical market caps, Company C has an enterprise value that is $1.2bn greater than that of Company A in comparison.

Any exercise of warrants on a company’s stock will increase the number of outstanding shares, thereby diluting its existing value. As the exercise of the warrants is typically done below the market price of the shares, it could potentially impact the company’s market cap. Market cap is based on the total value of all a company’s shares of stock. Float is the number of outstanding shares for trading by the general public.

What Factors Alter a Company’s Market Cap?

These stocks typically trade on the pink sheets or Over-the-Counter Bulletin Board (OTCBB). Comparing the two companies by solely looking at their stock prices would not give a true representation of their actual relative values. Market cap does not affect stock price; rather, market cap is calculated by analyzing the stock price and number of shares issued. Although a blue-chip stock may perform better because of organizational efficiency and greater market presence, having a higher market cap does not directly impact stock prices.

how to calculate market capital

However, if the company’s market cap is four times as large, the argument could be made that the company is underperforming. The simplest calculation of enterprise value is market capitalization plus net debt. Under the treasury stock method (TSM), the common share count factors in the exercise of potentially dilutive securities, resulting in a higher number of total common shares. Under an alternative approach, we can calculate the market cap by subtracting net debt from the enterprise value of the company. Such indexes not only represent the overall market developments and sentiments, but are also used as benchmarks to track the performance of various funds, portfolios, and individual investments.

What could impact a company’s market cap?

However, there is no guarantee of these companies maintaining their stable valuations as all businesses are subject to market risks. The market cap does not determine the amount the company would cost to acquire in a merger transaction. A better method of calculating the price of acquiring a business outright is the enterprise value. They are not as well-established as large-cap companies, so there’s more risk connected with investing in them; however, they are supposed to grow rapidly in the nearest future. The market capitalization formula is simply the enterprise value minus net debt.

The market capitalization metric, often abbreviated as “market cap”, represents the total value of a company’s equity, most often measured to analyze the valuation of publicly-traded companies. They are the largest publicly traded companies by market value, and typically represent the leaders of a particular industry sector or market. Market capitalization, or “market cap”, is the aggregate market value of a company represented in a dollar amount. Since it represents the “market” value of a company, it is computed based on the current market price (CMP) of its shares and the total number of outstanding shares.

Market Cap and Company Size

Investors can use a company’s classification and actual market capitalization value to make smart investment decisions. Generally, large-cap companies own more capital and assets than small-cap companies, and as such, are considered lower-risk investments than small-cap ones. Moreover, small-cap companies tend to show higher growth potential than their larger counterparts and, as such, are likely to provide investors with more opportunities for capital gains. Significant changes in the value of the shares—either up or down—could impact it, as could changes in the number of shares issued.

What is a fully diluted market cap?

However, the fact that Company C’s enterprise value exceeds that of Company A does not imply that the addition of debt to the capital structure increases its enterprise value. Market cap is also used to compare and categorize the size of companies among investors and analysts. Our DuPont analysis calculator can assist you in breaking down the ROE and understand its components. To do that, you can use our amazing discounted cash flow calculator that can indicate whether the stock is overpriced or not. We’ll now move on to a modeling exercise, which you can access by filling out the form below. However, in recent years, the industry norm has shifted towards more conservatism by taking into account all potentially dilutive securities issued, no matter if they are currently in or out of the money.

Companies that are considered micro-cap consist mostly of penny stocks—this category denotes companies with market capitalizations between $50 million to $300 million. One example is Bed Bath & Beyond Inc. (BBBY) which has a market cap of $2 billion as of Q2 2022, putting it right on the high-end of small cap stocks. Track records of such companies aren’t as long as those of the mid-to-mega-caps, but they also present the possibility of greater capital appreciation. Usually, this term refers to companies that have been operating for a long time. They are popular, stable, and well-established on the market, so investing in them is considered safe – even if short-term returns aren’t spectacular, investors can expect continuing growth of share value. Small-cap stocks have relatively lower market values because these tend to be younger growth companies.

Once we add the $4bn in market cap to the corresponding net debt value of each company, we get different enterprise values for each. In the next part of our tutorial, we’ll calculate the enterprise value starting from the market cap or equity value. Note that although it is not explicitly broken out here, the weighted average of the diluted share count should be used when calculating the market cap of companies. The proceeds received by the issuer as a result of the exercise are then assumed to be used to repurchase shares at the current share price, which is done to minimize the net dilutive impact. In effect, the formula isolates the value of the company belonging solely to common equity shareholders, which should exclude debt lenders, as well as preferred equity holders. The Market Cap, or “Market Capitalization,” is the total value of a company’s equity from the perspective of its common shareholders.