The market capitalization calculation is an important and useful stock valuation formula. Market capitalization (sometimes called market cap) is the total market value of all the company’s outstanding shares. This represents the value the market has placed on a company’s equity.
Market Capitalization Calculation
Market Capitalization = Number of shares outstanding multiplied by the price of the stock.
Why is this Stock Valuation Formula Important?
The market capitalization is the valuation the market is giving the equity of the company. When investors purchase a stock they are buying a fractional share of the whole company. Therefore, market cap represents the total price they would be paying for all of a company’s stock.
Market capitalization is the current value at which you can buy and sell your fractional share of the company. It provides a metric with which to compare profits, cash flows, revenues, expenses, assets, debt, etc. This makes it a relevant and important measurement in investment analysis. Remember, owing a stock represents a fractional ownership of the company.
Market Cap Categories
Market Cap categories are guidelines used to describe and segment stocks with various market valuations.
Over $200 billion. These are usually blue chip companies with excellent track records.
$10 – $200 billion. Mostly well established companies with well known products.
$2 – $10 billion. Many growth companies are in this category. Possible higher returns but generally greater risk than larger companies.
$300 million – $ 2 billion. Many small caps are younger companies with high growth potential and high risk.
$50 million – $300 million. Smaller companies with little wall street coverage. These stocks require tremendous due diligence before investing.
Using Market Cap to Calculate the Total Value of a Company
Market capitalization is the total value of the company’s equity. If you want to know the total value of a company; enterprise value takes market capitalization one step further by adding total debt and subtracting cash. This gives an investor a glimpse of the quality or risk of the company’s balance sheet.
Related Reading: Investment Analysis: High Probability Strategies