Two of the most common ways of assessing a company's value are market capitalization and equity (also known as shareholder equity). Each term describes a different way of looking at a company's value. It is helpful to consider both to get the most accurate picture of a company's worth.
Market capitalization is the total dollar value of all outstanding shares of a company. It is calculated by multiplying the current share price by the number of outstanding shares. Market analysts commonly use this figure to designate a company's size, as many stock market indexes are weighted by market capitalization. Because market capitalization is dependent on share price, it can fluctuate greatly from month to month, or even from day to day.
Shareholder equity is considered a more accurate estimate of a company's actual net worth. Equity is a simple statement of a company's assets minus its liabilities; it could also be seen as the net profit that would remain if the company were sold or liquidated at fair value. Unlike market capitalization, equity does not fluctuate day to day based on stock price.
Market capitalization value is nearly always greater than equity value, since investors figure in factors such as a company's expected future earnings from growth and expansion. It can be helpful to make an historical comparison between market capitalization value and equity value to see if there is a trend one way or the other. If market capitalization has grown steadily higher and further above equity value, this indicates increased confidence on the part of investors.
Both market capitalization and equity can be found by looking at a company's annual report. The report shows the number of outstanding shares at the time of the report, which can then be multiplied by the current share price to obtain the market capitalization figure. Equity appears on company's balance sheet.