Calculating A Company's Market Capitalization

Introduction

Market capitalization, also known as market cap, is an important metric for determining the size of a publicly traded company. It is calculated by multiplying the current total share count by the current market price of one share of the company's stock, and then expressed in terms of millions of dollars. Understanding and calculating market capitalization can help you better understand the company’s size, market value, and trading volume.

Definition of Market Capitalization

Market capitalization is a measure of the value of a company that is traded on the stock market. It is calculated by multiplying the number of shares of the company's stock that are currently outstanding by the current market price of one share. Market capitalization is expressed in millions of dollars.

Overview of How to Calculate It

Calculating market capitalization is relatively straightforward. It involves multiplying the number of shares of a company's stock (also known as shares outstanding) with the current market price of a share. Here is the formula for calculating market capitalization:

• Market capitalization = shares outstanding × current market price per share

Calculate the Firm’s Price per Share

Calculating the firm’s price per share is an important step in determining market capitalization. To accurately calculate the firm’s price per share, the following steps should be followed:

Determine the Company’s Price

The first step towards assessing the firm’s price per share is to determine what the current price of the company’s shares is. The company should provide this information for investor reference and it can generally be obtained from their website or from other financial information sources.

Factor in Equivalents That Could Impact Price

The next step is to factor in any equivalents that could impact the company’s price per share. This may include stock splits, certain company actions, dividends, or any other equivalents that might have a bearing on the share price. In doing so, this ensures that the price per share used in assessing the market capitalization will accurately reflect that of the overall market.

• Stock Splits
• Company Actions
• Dividends
• Other equivalents

Determine the Number of Outstanding Shares

In order to calculate a company's market capitalization, you must first determine the number of outstanding shares. Generally speaking, this number will represent all of the shares in circulation and active trading. These figures can be found in the company's financial statements, or in filings with the U.S. Securities and Exchange Commission (SEC).

Consider All Shares in Circulation

When calculating a company's market capitalization, all the shares available for public trading must be taken into account. This includes shares owned by individual shareholders, institutional investors, and the treasury of the company. Typically, this number is determined by adding the number of common shares, as well as any potential additional shares from special classes of stock.

Exclude Shares for Company Executives and Board Members

When calculating the number of outstanding shares for a company's market capitalization, it is important to exclude any shares held by company executives and board members. This is because these shares are reserved as a part of the company's corporate governance and are not available to the public for trading.

• Shares owned by individual shareholders
• Institutional investors
• Treasury of the company
• Common shares
• Special classes of stock
• Shares held by company executives and board members

Calculating A Company's Market Capitalization

Market capitalization (or market cap) is a measure of a company’s size, calculated by multiplying the total number of outstanding shares with the current market price per share. Consequently, it is an important measure of a company’s risk and an indicator of its value potential. Here is how to calculate a company's market capitalization.

Calculate Price Per Share

The first step to calculating a company’s market capitalization is to determine its current stock price. This is relatively straightforward if you are working with a publicly traded company as you can simply find the closing or current market price of the stock in the stock exchange. However, if the company is not publicly traded, then it will be more difficult to evaluate the current market value per share.

Multiply Price Per Share and Outstanding Shares

The next step is to find the total number of outstanding shares. This can be accessed from the company’s financial statements. Once you have the number of outstanding shares, all you have to do is multiply this by the current price per share. The result will be the company’s market capitalization.

• Price per share x Outstanding shares = Market capitalization

5. Consider Diluted Shares

When calculating a company's market capitalization, it is important to consider a company's diluted shares. Diluted shares are shares of the company that may potentially exist at some future point in time. These hypothetical shares would increase the number of outstanding shares and therefore change the value of the company.

a. Definition of Diluted Shares

Diluted shares are shares that may be issued as a result of certain financial instruments, such as stock options, convertible bonds, and other securities. These contracts allow holders to purchase additional shares of the company at a predetermined price. If the share price increases after the contract is issued, holders can acquire additional shares at a discounted price. This creates the potential for an increased number of outstanding shares, which would lower the market capitalization of the company when calculating its value.

b. Calculating Diluted Shares

Diluted shares can be calculated by determining the number of additional shares that could be issued as a result of current contracts. Options, such as stock options, and warrants, are generally accounted for separately as potential shares of a company. Convertible bonds and other securities can be calculated by determining the hypothetical price at which the securities could be converted into shares.

c. Incorporating Diluted Shares in Market Capitalization

For an accurate market capitalization, it is important to incorporate the potential diluted shares when calculating a company's value. To do this, the number of diluted shares should be added to the total number of outstanding shares and the total market capitalization recalculated.

It is important to note that the value of a company's shares is constantly changing and dilution can occur at any time as a result of new contracts or other corporate Actions. Therefore, investors should always include the potential for diluted shares in their calculations when determining the market capitalization of a company.

Impact of Other Factors

A company's market capitalization can be affected by a range of different factors. Two of the most important factors are fluctuations in the market, and changes in the company's management.

Market Fluctuations

The market is constantly changing and evolving, and this can have dramatic impacts on a company's market capitalization. If the overall market takes a downturn, then many companies suffer and their market capitalization can be significantly reduced. Conversely, positive trends in the market can have beneficial effects on a company's value. Companies that benefit the most from market fluctuations tend to be those that offer unique or desirable products and services, and those that can capitalize on current trends.

Changes in Management

Changes in a company's key management personnel can have an impact on its market capitalization. Poor decisions by management can quickly lower the value of a company, while the reverse is also true. Companies that are well-run and that use strong management practices are more likely to perform well over the long-term. A company's market capitalization can be affected positively by changes in management if the new leader brings with them fresh ideas and strategies for improving the business.

It is important to understand the different factors that can influence a company's market capitalization. A company's market capitalization can be significantly affected by fluctuations in the market, and by changes to its management team. Companies that are able to anticipate and react quickly to changing conditions are more likely to succeed in the long-term.

Conclusion

Calculating a company’s market capitalization is generally straightforward. A company’s market capitalization is simply the total value of the company, calculated by multiplying its share price by the total number of the company’s shares that are outstanding. Although understanding market capitalization is simple, it’s important to understand the factors that impact the number.

Summary of Calculating a Company’s Market Capitalization

To calculate a company’s market capitalization, take the current share price and multiply it by the total number of shares outstanding. To understand the value of a company thoroughly, investors and analysts must also look at other factors such as revenue, revenue growth, and operating expenses.

Overview of Factors Impacting the Number

A company’s market capitalization can be impacted by several factors, including the performance of the company, changes to the company’s overall business strategy, or changes to the existing market environment. Additionally, mergers or acquisitions can also alter the market capitalization of a particular company.

Impact of Market Fluctuations and Changes in Management

More broadly, market fluctuations or changes in management can have a large impact on the market capitalization of a company due to investor and customer perception. Companies with more assets and higher levels of profitability tend to have higher market capitalization. By proactively monitoring the factors influencing market capitalization and assessing new information, investors can be in a better position to accurately determine the true value of a company.