Market Capitalization: Calculation and Categories
The market capitalization calculation is an important and useful stock valuation formula for investment analysis. Market capitalization (a.k.a. market cap) is the total market value of all the company’s outstanding equity shares. This represents the total value the market has placed on the value of a company’s common stock.
Market Capitalization Calculation
Market Capitalization = Number of shares outstanding multiplied by the price of the stock. (shares outstanding X stock price)
Why is this Stock Valuation Formula Important?
When investors purchase a stock they are buying a fractional share of the whole company. Market capitalization is the total valuation the stock market is giving the equity of the company. Therefore, market capitalization represents the total price they would be paying for all of a company’s common stock instead of just purchasing a fractional share.
Market capitalization provides a common metric with which to compare profits, cash flows, revenues, expenses, assets, debt, etc. Remember, owning a stock represents a fractional ownership of the company. Market capitalization is the current value at which you can buy and sell your fractional share of the company. This makes it a relevant and important measurement for financial analysis.
Market Capitalization Categories
Categories are guidelines used to describe and segment stocks with various market valuations.
Mega Cap – Over $200 billion. These are usually blue chip companies with excellent track records.
Large Cap – $10 – $200 billion. Mostly well established companies with well known products.
Mid Cap – $2 – $10 billion. Many growth companies are in this category. Possible higher returns but generally greater risk than larger companies.
Small Cap – $300 million – $ 2 billion. Many small caps are younger companies with high growth potential and high risk.
Micro Cap – $50 million – $300 million. Smaller companies with little wall street coverage. These stocks require tremendous due diligence before investing.
Market Capitalization Relationship to Enterprise Value
Market capitalization is the total value of the company’s equity. However, if you wanted to purchase a whole company you would need to make adjustments for their debt and cash balances. Therefore if you want to calculate the total value of a company (i.e. determine takeover value) you would want to make those adjustments. Enterprise value takes your analysis one step further by adding total debt and subtracting cash.
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