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 they're 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, 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.