A:

There are many methods for estimating the worth of a company. Whether in economics, accounting, investing, or elsewhere in the finance sector, the accurate appraisal of a company's value can have a huge impact on important financial decisions. It is important to understand the difference between the various metrics of value.

Market capitalization and revenue are two of the simplest types of value estimation, but are often frequently misunderstood.

What Is Market Capitalization?

Market capitalization is essentially the amount of money it would take to purchase an entire company based solely on its stock price. It is calculated by multiplying the total number of shares outstanding by the current price of a single share of stock. As the shares outstanding and the stock price fluctuate, so does the market cap.

This is a very simplistic view of company value in terms of its value, as it does not take into account outstanding debt, long-term growth potential or the company's liquid assets. The stock price is a reflection of the price that the public believes shares in the company to be worth. Market cap can be a very useful metric, as it incorporates company reputation and public sentiment.

For example, if Company A was trading at $40 per share and had a million shares outstanding, then the market capitalization would be $40 million ($40 x 1 million shares).

What Is Revenue?

While revenue is just as simple, it has only one interpretation. Revenue is simply the amount of money flowing into a company as a result of the sale of goods and services.

Revenue is the top line of an income statement. It is the total sum of positive cash flow. All overhead, administrative and operational expenses are deducted from this amount to arrive at the net profit. However, sales tax is not included in revenue figures; it is collected by companies on behalf of the state and is not considered to be income.

Investors will often consider a company's revenue and net income separately to determine the health of a business.

RELATED FAQS
  1. What is the weighted average of outstanding shares? How is it calculated?

    The weighted average of outstanding shares is a calculation that incorporates any changes in the amount of outstanding shares ... Read Answer >>
  2. What is the difference between authorized shares and outstanding shares?

    Calculating financial ratios can help investors understand a company's financial position, but only when a knowledge of various ... Read Answer >>
  3. What is the formula for calculating earnings per share?

    Learn how to calculate earnings per share and why it's an important gauge in determining a stock’s value and a company's ... Read Answer >>
  4. What is the difference between revenue and sales?

    Revenue is the income a company generates before any expenses are taken out. Sales are the proceeds from the selling of goods ... Read Answer >>
  5. How do earnings and revenue differ?

    Revenue is the total income earned by a company for selling its goods and services. Earnings are the bottom line on a company's ... Read Answer >>
  6. How Can Trading Volume Exceed Shares Outstanding?

    The number of shares traded can be greater than the number of outstanding shares, but it's rare. Read Answer >>
Related Articles
  1. Investing

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
  2. Investing

    Types Of Shares: Authorized, Outstanding, Float And Restricted Shares

    A company’s financial statements may refer to multiple types of stock, including authorized, outstanding, float and restricted shares. If a company issues more shares, its outstanding shares ...
  3. Investing

    The Basics Of Outstanding Shares And The Float

    We go over different types of shares and what investors need to know about them.
  4. Investing

    The 5 Types Of Earnings Per Share

    Learn the five varieties of Earnings Per Share (EPS) and what each represents can help an investor determine whether a company is a good value, or not.
  5. Investing

    Methods used in valuing private companies

    There are a few methods for calculating the valuation of a private company. By using financial information from peer groups, we can estimate the valuation of a target firm.
  6. Investing

    McDonald's Stock: Capital Structure Analysis (MCD)

    Learn about the importance of capital structure, and what equity and debt capitalization measures can tell us about the performance of McDonald's Corporation.
  7. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  8. Investing

    3 Profit Metrics Every Investors Should Understand

    In this article, you will understand how the three metrics gross profit, operating profit, and net profit helps investors see how a company is performing.
RELATED TERMS
  1. Large Cap - Big Cap

    Large cap refers to a company with a market capitalization value ...
  2. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a measure used to ...
  3. Business Valuation

    Business valuation is the process of determining the economic ...
  4. Sales To Cash Flow Ratio

    The sales to cash flow ratio shows how efficiently a business ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, ...
  6. Invested Capital

    Invested capital is the total amount of money that was endowed ...
Trading Center