Skip to main content

What is market capitalization ?

A Company’s market capitalization is calculated by multiplying the number of outstanding stocks and the current market price of one share. This one way to calculate the value of the business by investors (Investopedia, n.d.).
For example “Xyz Company” has 10 million outstanding shares and in a major stock exchange, one share is being sold at $50. In that case, the market capitalization of this company is only $500 million and investors might call it a small cap company at current context. Apple, Google, Exxon they are big cap companies, but the formula to calculate market cap is same all across for all companies.
It is a fairly easy way to calculate the value of a company and an investor might decide to invest solely based on the market cap, although that won’t be a good investing strategy. One simple fact is, an investor with $50 million to invest can buy every single share ( but the current shareowners should be willing to sell) and own 100% of the business.
Market capitalization definitely tells us how the market values the company, risk, the future of the business and capabilities of generating cask. But then it is all from market’s perspective, might not necessarily be accurate.
So the weaknesses are, for example during great depression or more recently during financial crisis many great companies share price fell and market capitalization also fell dramatically, but the underlying business model was not impacted due to the fall of the share price. So, greatest weakness is, the market cap is not the greatest tool to measure the strength of the underlying business.

Book Value – is the value of the business based on the balance sheet.
Book value = total assets – total liabilities
In other words, it is the difference between the total assets and total liabilities (Investopedia, n.d.).  If we go back to “Xyz company”, say its total asset is (i.e.: current assets+ long-term assets) worth 1 billion and total liabilities (i.e.: current liabilities + long-term liabilities) worth 1 billion to. In that case, the book value of the business will be worth 0 dollars.
            Now you can ask, then why the market capitalization is 500 million. The market values the customer base the company has the employee, the knowledge and other intangible assets the company might have, more importantly, the market values the earning potential of the company in future. Hence book value and market capitalization are very different valuation methods.

Now for certain companies such as real estate or banks, book value might be important. Especially for a real estate company that sells properties. We can figure how much property or inventory they have to sell, same goes for banks, we can understand if the bank has more assets to back all the liabilities. But market capitalization would vary based on the earning potential or expectation, and it might not work based on book value all the time. Another instance might be, sometimes the older the company gets the better the book value of the company gets. One example would be unsold inventory, equipment, even the old equipment those are not being used anymore help to boost the book value. But all those assets do not help the company earn more, so the market capitalization might not get much help from a big book value.
Book value can be calculated per share too. book Value per share = Total book value/number of outstanding shares.

 References:

Retrieved on 5/12/2018. Retrieved from https://www.investopedia.com/terms/m/marketcapitalization.asp           
Retrieved on 5/12/2018. Retrieved from https://www.investopedia.com/articles/investing/110613/market-value-versus-book-value.asp

Comments

Popular posts from this blog

Question and Answer

      * These attacks consist of injecting malicious client-side scripts into a website and using the website as a propagation method is: These attacks consist of injecting malicious client-side scripts into a website and using the website as a propagation method is: XML External Entities Cross Site Scripting (XSS) Security Mis Configuration Injection * A security principle, that ensures that authority is not circumvented in subsequent requests of an object by a subject, by checking for authorization (rights and privileges) upon every request for the object is ____.   A security principle, that ensures that authority is not circumvented in subsequent requests of an object by a subject, by checking for authorization (rights a Complete Mediation Least Privileges Separation of Duties Weakest Link * ...

What are the challenges Zara face to maintain it's growth?

Notably, Zara has a unique approach to handle changing demand, which has allowed the company to become widely successful and a leading business organization in the fashion retail industry, in which many corporations struggle to deal with fast-changing environments, operations, and inventory costs. The arrival of new trends forces retailers to adapt their collections, causing what James (2011) calls the Forrester or bullwhip effect. Zara relies heavily on outsourced manufacturing, even though most operations and inventory decisions and strategies are still held, taken, and based out on their headquarters in Spain. Every time an order is placed, all items are shipped to Spain for final design adjustments and inventory stocking. With the use of technology and collaboration with its store managers, the company can produce only what is currently trending, which results in a significant reduction of unsold items caused by the rapidly changing tastes of consumers in this fast-changing ind...

How Toyota New Global Architecture (TNGA) revolutionize the automobile manufacturing industry?

Toyota New Global Architecture (TNGA) system was created to revolutionize the actual automobile manufacturing systems. TNGA aims to promote a massive transformation in Toyota's development processes by emphasizing in harmony between planning and design, which, when appropriately combined and managed, will increase the company’s efficiency (N.A., 2015). Toyota's TNGA system is revolutionary because it creates an even leaner way of designing and manufacturing its cars and establishes a new era of vehicle design and production. From a different perspective, TNGA is a revolutionary system not because it employs a modular approach; since companies like Nissan and Volkswagen already use modular systems in their production plants (Schmitt, 2015). It is revolutionary because it is disruptive and expands the traditional and legendary Toyota’s lean methodology to a different level (N.A., 2015). This new global architecture system is disruptive to the old Toyota Production System (T...