Market Capitalisation

Market Capitalisation equals the Share Price by the Number of Shares. It represents the true value that Stock Investors are prepared to pay for the Company at that point in time. Market Cap is not a Valuation.

Market Capitalisation is a very simple but critical concept to understand and keep in mind when investing in Stocks. It is the total market value of all listed shares. Market Cap, is used to segment the Stock Market by size into Large Cap, Mid Cap, Small Cap and Micro Cap. The formula is:

Market Cap = Number of Listed Shares X Share Price.

Clearly, looking at the formula, there are two main factors that could dramatically change a Company’s Market Cap. Firstly, when the Stock Price changes significantly, this could occur if there is an Earnings surprise, up or down. A recent example is Facebook. Or when the number of Shares outstanding changes dramatically, via a Share Issuance or Repurchase.

Calculating the Market Cap is a quick way to estimate a Company’s value, but this is not a Valuation. A Valuation is based on the analysis of a Company’s fundamentals, typically the Intrinsic Value based on the Discounted Cash Flow per Share. Or a comparative Ratio Analysis, Price to Sales, PE Ratio, Dividend Yield, Price Cash Flow per Share, Price to Book Value covering comparative rates of growth in Sales and Earnings. One important calculation of a Company’s Value where Market Cap is a parameter is Enterprise Value (EV), which gives the Total Value for a Company. The formula is:

EV = Market Cap + Debt (used in Mergers & Acquisitions)