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Market Capitalization vs. Market Value: An Overview
Market capitalization is the number of a company’s shares outstanding multiplied by the current price per single share. Market value is more complicated. It’s assessed using numerous metrics and multiples including price-to-earnings, price-to-sales, and return-on-equity.
Accurately assessing the value of a company can be of utmost importance in many areas of the financial sector, including economics, accounting, and investing. Company sizes and values can be measured in numerous ways and there’s often confusion concerning similar-sounding terms.
That’s the case with market capitalization and market value. Each is a measure of corporate assets but the two are vastly different in their calculation and precision.
Key Takeaways
- Market capitalization and market value are both measures of corporate assets but they’re vastly different in their calculation and precision.
- Market capitalization is calculated by multiplying the number of shares outstanding by the current market 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.
- Market capitalization refers to the market value of a company’s equity, not its market value overall.
Market Capitalization
Market capitalization or “market cap” is a simple metric based on stock price. You can calculate a company’s market cap by multiplying the number of its shares outstanding by the current price of a single share. 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, but stock prices themselves are highly subjective in many cases. The price of a stock doesn’t follow any mathematical formula in its movements, although day traders are always trying to come up with money-making equations.
Different factors are weighed in the price in vastly different ways, so even market capitalization can be a somewhat subjective measure of value.
Market Value
Market cap is often referred to as the value of a company or what a company is worth, but finding a company’s true market value is far more complex.
Market value is determined by valuations or multiples accorded by investors to companies, such as price-to-sales, price-to-earnings, and enterprise value-to-EBITDA. These metrics take several factors into account in addition to stockholder equity.
Factors include outstanding bonds, long-term growth potential, corporate debt, taxes, and interest payments. The higher the valuations, the greater the market value.
Important
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 they rise during the bull markets that occur during economic expansions.
Market value can depend on numerous other factors, such as the sector in which a company operates, its profitability, its debt load, and the overall market environment. It also reflects investor or analyst opinion.
For example, imagine if company X and company Y are both technology companies with $100 million in annual sales. But if X is a fast-growing technology firm that’s investing heavily in R&D, its market value will generally be higher than company Y’s. Even though they have identical cash flows, investors will expect greater innovation and more new products from company X.
Key Differences
The terms market capitalization and market value aren’t confused just because they sound similar. People often use the two interchangeably. They refer to a company’s market cap as its “market value,” as its “stock market value,” or as its “value in the marketplace.”
But they’re referring to a specific type of market value when they do this. Market capitalization is essentially a synonym for the market value of equity.
A company’s market cap is a single, incontrovertible figure because it’s the number of outstanding shares multiplied by the price of a share. Market valuations can vary depending on the exact metrics and multiples that an analyst uses.
Explain Like I’m Five
Investors use market capitalization and market value to measure the value of a company so that they can determine if it is a good investment. Both measures rely on subjective evaluations, and neither is perfect.
A company’s market cap is the price you would theoretically pay to buy the whole company, if you bought every share at the current market price. In practice, this is impossible, since such a large order would cause the price to change.
Market value is a more complicated figure that compares a company’s earnings, sales, debts, and the outlook for its industry as a whole. Unlike market cap, there’s no single formula for market value, and each analyst will place different weights on different factors.
Why Is Market Cap Important?
Market cap is a good insight into the size of a company. It can be used as a tool to compare companies as well. Market cap is the most representative guideline for analysis and a base for all other financial metrics.
Is Market Cap Always Higher Than Book Value?
Consistently profitable companies usually have market values that are greater than their book values. Investors have confidence in the company’s ability to generate growth in both revenue and earnings.
Is Market Value the Same as Current Price?
No, it’s not. Market value is the company’s value calculated from its current stock price. It rarely reflects the actual current value of a company. Market value can instead be considered a measure of public sentiment about a company.
The Bottom Line
Market capitalization and market value are both calculations based exclusively on corporate assets. Market capitalization is the number of a company’s shares outstanding multiplied by the current price of a single share. Market value is more complicated because it uses numerous metrics and multiples in its calculation: price-to-earnings, price-to-sales, and return-on-equity.
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 its market capitalization.
