What Is the Difference Between Market Capitalization and Revenue?

There are many methods used to estimate a company's worth, and the accurate appraisal of a company's value affects many financial decisions. Market capitalization and revenue are two of the simplest metrics used for value estimation, but they are often frequently misunderstood.

Key Takeaways:

  • Market capitalization and revenue are two metrics used for value estimation
  • Market capitalization reflects the total value of a company based on its stock price.
  • Revenue is the amount of money a company earns as a result of sales.
  • It is possible for a company to have a large market cap but low revenues.

Understanding the Difference Between Market Capitalization and Revenue?

Market capitalization reflects the total value of a company based on its stock price. It is calculated by multiplying the number of shares outstanding with the share price. For example, if Company A was trading at $40 per share and had a million shares outstanding, the market capitalization would be $40 million ($40 x 1 million shares).

Revenue, on the other hand, has nothing to do with the share price. Revenue is the amount of money a company pulls in as a result of sales. It is possible for a company to have a large market cap but low revenues.

Internet startups are cases in point. If they are considered to have potential by the market, their stock might be in demand and priced high even if they are not yet showing high sales. It is also possible for a company to have a low market cap and huge revenues. For example, a large car manufacturer could be running at a loss despite substantial revenues and be on the verge of bankruptcy. In this case, there would be little demand for its shares, and the share price would be low.

Market Capitalization

Market capitalization, or market cap, is essentially the amount of money it would take to purchase an entire company based solely on its stock price. As the shares outstanding and the stock price fluctuate, so does the market cap.

Market cap provides a simplistic view of a company's 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 at a point in time. Market cap can be a useful metric as it incorporates company reputation and public sentiment.

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.