Understanding the value of a company is an important task and helps you compare the size of one company with another. Market capitalization is one of the most effective methods of ascertaining what a company is worth. Market capitalization measures the value of a company on the open market.
What is market capitalization?
Market capitalization, commonly known as market cap, refers to the total market value of a company’s outstanding shares. Market cap is calculated by multiplying the total number of outstanding shares by the current market price of one share. Since outstanding shares are traded publicly, market capitalization is used in lieu of sales or total asset figures by investors to determine a company’s size.
Market cap only reflects the equity value of a company and is sometimes used to rank the size of companies. Companies are typically divided as per the market capitalization: Small-cap (Below Rs. 5000 cr), mid-cap (B/w Rs 5,000 cr and less than Rs 20,000 cr) and large-cap (Rs. 20,000 cr and more).
Market capitalization formula
As mentioned earlier, simply multiply the share price by the number of outstanding shares. The following market cap formula can provide clarity to investors:
MC = N X P
Where,
MC is market capitalization
N is number of shares
P is market price of each share
For example, if a company has 100,000 shares outstanding and the closing price per share is Rs. 100. Its market capitalization would be:
= 100,000 X Rs. 100
= Rs. 1,00,00,000
The company would have a market cap of Rs. 1cr. If the closing price per share rises to Rs. 200, the market cap would be Rs. 2 cr (100,000 X Rs. 200 = Rs. 2,00,000). However, if the price drops to Rs. 75, the market cap would fall to Rs. 75 lakh.
Importance of market cap
It is important to understand the concept of market capitalization, especially for investors, as it will help them find out a company’s valuation as well as the market’s perception of its future prospects. When creating a long-term investment plan, it is crucial for investors to understand the value of a company as it shows the stage of development of a company in its business venture.
- Market cap is a universally used method to calculate the worth of a company, which helps global investors to find out the value of a company.
- Investing in any company is always subject to risks as it can fluctuate due to many factors. Market cap is a reliable method to assess the risk associated with investing in a company.
- Market cap is used to evaluate the shares of different companies to index in the share market. Stocks with higher market cap get better weight in the index.
- It is a simple method for investors to compare different companies. This not only helps in understanding the size of a company but also the risk associated with investing in them.
While market cap is a universally accepted method, you must note that it doesn’t include debt and other financial liabilities of a company. Moreover, different types of returns like dividends, splitting of stocks, etc. are not considered in market capitalization.
Difference between market cap and enterprise value
The difference between market cap and enterprise value is that market cap only reflects the equity value of a company. Enterprise value (EV) is a more comprehensive method that takes into account outstanding debt, preferred stock, and other factors.
Enterprise value can be calculated using the company’s market capitalization plus total debts and subtracting its cash. Many investors consider EV as a rough estimate of the cost of acquisition of a company and taking it private.
Enterprise value = Market cap + debt – cash
Types of companies based on market cap
There are 3 different types of companies based on the market capitalization. The market cap of a company can help investors to determine the stocks they want to invest in, and how to diversify their portfolio with companies of different sizes.
| Type of company | Market cap |
|---|---|
| Large cap | Rs. 20,000 cr and more |
| Mid cap | From Rs. 5,000 cr to less than Rs. 20,000 cr |
| Small cap | Below Rs. 5000 cr |
Top 10 international companies by market capitalization
Presently, largest 10 companies by market capitalization in the world are given below:
| Company | Market capitalization ($) | Country |
|---|---|---|
| Apple | $2.649 T | USA |
| Saudi Aramco | $2.299 T | Saudi Arabia |
| Microsoft | $2.090 T | USA |
| Alphabet (Google) | $1.535 T | USA |
| Amazon | $1.420 T | USA |
| Tesla | $910.03 B | USA |
| Berkshire Hathaway | $643.83 B | USA |
| UnitedHealth | $501.92 B | USA |
| TSMC | $456.05 B | Taiwan |
| Visa | $455.67 B | USA |
Top 10 Indian companies by market capitalization
Top 10 companies by market cap in India are given below in the table along with their current market capitalization:
| Company | Market cap (Rs.) |
|---|---|
| Reliance Industries | 1,736,558.70 cr |
| Tata Consultancy Services | 1,234,545.64 cr |
| HDFC Bank Limited | 811,979.58 |
| Infosys | 681,271.63 cr |
| Hindustan Unilever Limited | 622,418.47 cr |
| ICICI Bank | 582,041.77 cr |
| State Bank of India | 464,347.55 cr |
| State Bank of India | 464,347.55 cr |
| Bajaj Finance | 444,494.03 |
| Housing Development Finance Corporation Limited | 434,438.50 |
Market cap is a quick and easy way of evaluating a company’s value. Investment community uses it to determine a company’s size instead of sales or total asset figures. Acquirers use the market cap to determine whether the company being acquired represents a good value to them.
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