Equity Market Capitalization
Categories: Company Valuation, Stocks
An individual company's market capitalization ("market cap" to its homies) represents the total value of the company's outstanding stock. Look at the stock price at any given moment if that company is publicly traded. Multiply that per share price by the number of shares outstanding.
That figure represents the market cap. Like, if a company has 300 million shares outstanding and its stock price is trading at $40 a share, then the market capitalization of the company is $12 billion. But this figure can be misleading. Specifically, the equity capitalization fo a company refers to the value that investors are paying for its future earnings or value creation.
So if a company has, say, $10 billion in cash and no debt on its books, then the Street, in paying $40 a share, is only giving it credit for its operations being worth just $2 billion. That is, the net equity value in the company is way less than the market capitalization would have you believe.
Okay, so...some math.
Hair Extensions for Dogs, Inc. has 20 million shares outstanding and trades publicly for $30 a share. The stock market is paying 30 bucks a share for the company, so it is the market that is setting a price on the whole company.
That is, for 30 bucks, you get 1 20-millionth of a company, with $30 million in earnings, no debt and $200 million in cash. All of it together comprises the total value of the company. So that's the market capitalization.
Equity capitalization looks at cash and debt and sometimes other easily sellable assets. But to keep things simple, just imagine that Hair Extensions for Dogs, Inc has a 600 million dollar market cap, no debt, and $200 million in cash sitting in its Wells Fargo account.
The market cap is $600 million but the equity cap is $400 million.
Why? Well, if the company wanted, it could dividend out the $200 million of cash that it has, or use it to buy back its own stock, or whatever else it wants. Maybe throw a huge party? Maybe not.
So the equity cap is $400 million. And this is an important number, because with the company earning $30 million this year and, say, $40 million next year, on that $600 million number it trades at 20 times this year's earnings, and 15 times next years.
But that’s its market cap. It's about where the overall stock market is trading, give or take. But if you back out the cash, the equity, or earnings power of the company, at just 400 million, is trading at 13x this year's earnings, and just 10 times next year's earnings. Cheap. Really cheap relative to its growth rate. So maybe this company is a screaming buy, and investors should pay attention.
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finance a la shmoop- what is compounding value or compounding interest? ah the
power of compounding. it makes trees stronger pollution more feral and the
rich well richer. how so well let's start with compounds kissing
cousin with six toes, arithmetic compounding. right so the first was [feet with six toes pictured]
really geometric compounding now we're talking about arithmetic compounding. if
you invest a thousand bucks in a ten-year bond that pays 6% of a year in
interest, the dough comes back to you in a pattern that looks like this - like
every six months they pay thirty bucks and it's $60 a year, got it? nice. you get
the total of sixteen hundred bucks back from your investment and the cash that
came back to you you know came in small parts all along the way, until you got [list of yearly returns]
about two thirds of it or sixty percent at the end right? if you just spent that
money and collected your thousand bucks at the end that's it. okay so that's
arithmetic compounding/ the money comes to you if you don't reinvest it.
ding-ding-ding that's the key here and you just go buy burgers. okay so now
let's look at what six percent compounded looks like over the same
10-year period .well at the end of year one it's a thousand sixty bucks and note
we're only gonna compound it annually we probably should do the semi-annually but [list of yearly compounds]
we'd confuse you even more so don't do that. but then you essentially reinvest
that money and you get another six percent compounded on that thousand
sixty , instead of six percent compounded against the original thousand. so by the
end of year two you'll have a thousand one hundred twenty three sixty. and by
the end of year ten you'll have one thousand seven hundred and ninety
dollars and eighty-five cents. so why do you make so much more money when you
compound interest versus getting 30 bucks twice a year like you would in
this bond example? go and find burgers with it? yeah .you don't want to do that
well essentially what's happening is that you're delaying your gratification [man in a drive through window]
of getting that sweet sweet cash or getting liquid whatever you want to call
it. by reinvesting your gains year after year after year. so do you have that sort
of self-control? do you need the cash yeah that's the question if you for
example have trouble making it home from your local pizza spot with the pie
in tact well then compound interest keeping the discipline to not spend the [man eats pizza while driving]
money today and wait for the happiness tomorrow well when that may not be for
you. sorry