A:

There are many methods for estimating the worth of a company. Whether in economics, accounting, investing, or elsewhere in the finance sector, accurate appraisal of a company's value can have a huge impact on important financial decisions. Depending on the situation, differing definitions of value may serve better than others, but it is important to understand the difference between the various metrics. Market capitalization and revenue are two of the simplest types of value estimation, but they are also frequently misunderstood.

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.

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.

RELATED FAQS
  1. What is the difference between market capitalization and market value?

    Understand the difference between market capitalization and market value, including the elements used for the calculation ... Read Answer >>
  2. What is the difference between market capitalization and equity?

    Understand the difference between market capitalization and equity, two primary measurements used to evaluate the worth of ... Read Answer >>
  3. What is the difference between market capitalization and shares outstanding?

    Understand the relationship between shares outstanding and market capitalization and how market cap is interpreted to establish ... Read Answer >>
  4. Enterprise value versus market capitalization

    Learn the difference between market capitalization and enterprise value, and understand how these two common valuation tools ... Read Answer >>
  5. 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 >>
  6. What is the difference between economic value and market value?

    Learn about the differences between economic value and market value. Discover how they serve different purposes for businesses ... Read Answer >>
Related Articles
  1. Investing

    Market Capitalization Defined

    Find out the differences between mega-, large-, mid- and small-cap stocks and how each suits different investing styles.
  2. Investing

    Using Enterprise Value To Compare Companies

    Learn how enterprise value can help investors compare companies with different capital structures.
  3. Investing

    Valuing Large-Cap Stocks

    Investors seeking to preserve capital in volatile markets might want to consider large-cap stocks.
  4. Investing

    The 5 Types Of Earnings Per Share

    A look at 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

    Cheap Stocks or Value Traps?

    The value of stocks that trade at less than cash per share can be deceiving.
  6. Small Business

    Public Vs. Private Tech Valuations: What's Driving the Divide?

    The gross valuations over the past five years are more indicative of the market than the true value of the company itself.
  7. Investing

    Market Value Versus Book Value

    Understanding book value and market value is helpful in determining a stock's valuation and how the market views a company's growth prospects in the future.
  8. Investing

    Cash Flow From Investing

    Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it.
RELATED TERMS
  1. Market Value Of Equity

    The total dollar market value of all of a company's outstanding ...
  2. Revenue

    Revenue is the amount of money that a company actually receives ...
  3. Large Cap - Big Cap

    Large cap refers to a company with a market capitalization value ...
  4. Capitalization

    Capitalization, in accounting, is when the costs to acquire an ...
  5. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure ...
  6. Cash Flow Per Share

    A measure of a firm's financial strength, calculated as: Cash ...
Hot Definitions
  1. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  4. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center