Market Capitalization Versus Market Value: An Overview
In many areas of the financial sector, including economics, accounting, and investing, accurately assessing the value of a company can be of utmost importance. There are numerous ways to measure company size and value, and there is often confusion concerning similar-sounding terms.
Two such misleading terms are market capitalization and market value. While each is a measure of corporate assets, the two are vastly different in their calculation and precision.
- While market capitalization and market value are both measures of corporate assets, the two are vastly different in their calculation and precision.
- Market capitalization is calculated by multiplying the number of shares outstanding by the current price of a single share.
- Market value is assessed using numerous metrics and multiples including price-to-earnings, price-to-sales, and return-on-equity.
Market capitalization, or market cap, is a simple metric based on stock price. To calculate a company's market cap, multiply the number of shares outstanding by the current price of a single share.
For example, a company with 50 million shares and a stock price of $100 per share would have a market cap of $5 billion. Market capitalization is often used to help define the value of a company when analyzing potential trade opportunities.
However, stock prices themselves are highly subjective in many instances. The price of a stock does not follow any mathematical formula for definitively valuing a stock. Different factors are weighted in vastly different ways, which means that even market capitalization is still a somewhat subjective measure of value.
While market cap is often referred to as the value of a company, or what a company is worth, a company's true market value is infinitely more complex. Market value is assessed using numerous metrics and multiples, such as price-to-earnings, price-to-sales, and return-on-equity. These different metrics take into account several factors in addition to stockholder equity, such as outstanding bonds, long-term growth potential, corporate debt, taxes, and interest payments.
Market value can fluctuate greatly over time and is heavily affected by business cycles; market values plunge during the bear markets that accompany recessions and rise during the bull markets that occur during economic expansions.
Market value is also dependent on numerous other factors such as the sector in which the company operates, its profitability, debt load, and the broad market environment. It is also representative of investor opinion. For example, Company X and Company Y may both be technology companies with $100 million in annual sales, but if X is a fast-growing technology firm that is investing heavily in R&D, X’s market value will generally be significantly higher than that of Company B because investors expect greater innovation and newer and better products from Company X.
Confusion between market cap and market value stems from the fact that market capitalization is essentially a synonym for the market value of equity. However, these concepts are simple calculations based on assets only.
Neither of these metrics should be confused with the book value of a company, which is its net worth of a company. The book value is calculated by subtracting non-monetary assets and liabilities or debts from a company’s total assets. A company’s book value may be lower or higher than its market value or market capitalization.