Understanding Market Capitalization Versus Market Value
Market Capitalization vs. 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. However, numerous ways exist 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. Market capitalization is basically the number of a company’s shares outstanding multiplied by the current price of a single share. Market value is more amorphous and more complicated, assessed using numerous metrics and multiples, such as price-to-earnings, price-to-sales, and return-on-equity.
Key Takeaways
- 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.
- Confusion often arises because, when referring to a company, market capitalization is often used synonymously with market value—though technically, it means the market value of its equity, not its market value overall.
Market Capitalization
Market capitalizationor 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 in its movements (though day-traders are always trying to come up with money-making equations). Different factors are weighted in the price in vastly different ways, which means that even market capitalization is still a somewhat subjective measure of value.
Market 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 determined by the valuations or multiples accorded by investors to companies, such as price-to-sales, price-to-earningsenterprise value-to-EBITDA, and so on. 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. The higher the valuations, the greater the market value.
A company’s 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 can be dependent on numerous other factors, such as the sector in which the company operates, its profitability, debt load, and the overall market environment. It also reflects investor or analyst 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 Y because investors expect greater innovation and newer and better products from Company X.
Key Differences
Market capitalization and market value don’t get confused just because they sound alike. People often use the two interchangeably, referring to a company’s market cap as its “market value” or “stock market value” or “value in the marketplace.” But when they do, they’re referring to a specific type of market value. Market capitalization is essentially a synonym for the market value of equity.
Also, since it’s simply the number of outstanding shares multiplied price, a company’s market cap is one single incontrovertible figure. Market valuations can vary, depending on the exact metrics and multiples the analyst uses.
Special Considerations
Market capitalization and market value are both simple calculations exclusively based on corporate assets.
Neither of these metrics should be confused with the book value of a company, which is its net worth. 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.