What is the capitalization of the company. The capitalization of the company is the main indicator of the effectiveness of its work. Disadvantages of valuing a company by market capitalization

It is calculated by multiplying the number of shares in free float (shares outstanding) by the current market price of one share. In the investment community, it is customary to use this indicator as a measure of the company's size, instead of such less convenient parameters as sales volume or total cost assets.

Reflecting the size of the company is an important function of this indicator, since a large number of characteristics that interest investors depend on it. This parameter is easy to calculate: if a company put up for sale 20 million shares at a price of $100 per share, then its market capitalization is $2 billion.

Given the simplicity of this indicator and its usefulness in assessing risk, traders and investors can easily use it to find interesting stocks and diversify their portfolio by including companies of different sizes.

Large-cap companies typically include those with a market capitalization of $10 billion or more. Most of them have been on the market for a long time and play an important role in established industries. Investing in shares of such companies does not always bring high returns in a short time period. However, in the long run, these corporations reward their investors with stable share price growth and regular dividend payments. An example of a large-cap company is International Business Machines Corp.

For mid-cap companies, this parameter usually ranges from 2 to 10 billion US dollars. These are established companies that can be expected to grow rapidly. Mid-cap companies are in the process of expanding. The risks are higher when dealing with them than when dealing with highly capitalized corporations because they are not so well established. But they have good growth potential. Eagle Materials Inc. is an example of a mid-cap company.

Companies with a market capitalization between $300 million and $2 billion are usually classified as small cap companies. These are small and often young companies operating in niche markets or new industries. Given the age of such companies, their size and scope of activity, investing in them is considered quite risky, because small companies those with limited resources are more susceptible to economic downturns.

Misconceptions About Market Capitalization

Although this parameter is used as one of the characteristics of the company, it does not reflect the value of its share capital. To determine it, a thorough analysis of the fundamental indicators of the company is required. The market capitalization parameter does not characterize the value of the company, since the market price on the basis of which it is calculated does not always reflect the real value of the business. Stocks in many cases are overvalued or undervalued by the market.

Market capitalization does not tell you how much a company might be worth in the event of a takeover. The purchase price of a business is better reflected by such an indicator as the value of the enterprise (enterprise value).

Change in market capitalization

Significant changes in the market capitalization of a company can occur under the influence of two main factors:

• a significant change in the share price;
• additional issue or redemption by the company of its shares.

Today we will dwell on such a concept as "capitalization". In the economic literature, this term is commonly used to mean the use of a firm's free capital to increase income.

Thanks to capitalization, the enterprise not only increases the amount of available capital, but also other material assets. The process of capitalization is best considered with a specific example. Let's say you're in production of one hundred dollars and have received an income of $50. The capitalization process involves investing $50 in profits into production in order to expect to receive even more income.

Capitalization. Peculiarities

The increase in capital during capitalization depends on various factors, among which the following deserve special attention:

1. The firm's income. The higher the profit of the organization, the greater the amount of additional capital. If all additional capital is used to increase the firm's assets, then the amount of material assets will increase, which will allow the firm to effectively develop and enter new market segments.
2. Liquidity of shares/bonds of the enterprise. This factor significantly affects capital increases.

To determine the percentage of capitalization of an enterprise, it is necessary to assess its financial condition at least once a year. You can also apply reporting for 2-3 years, which makes it possible to identify a trend towards an increase / decrease in this indicator.

In the credit and financial sector, the term "capitalization" is usually understood as the addition to the body of the deposit received in the form of interest profits.

The term "capitalization" is also used in the stock markets. In this case, this concept is not linked to financial/current assets. In the stock market, to determine the percentage of capitalization, the increase in the volume of shares / bonds that are in circulation is taken into account.

Market capitalization

The concept of “market capitalization” means the percentage increase in capital, both of the organization being valued and of a specific market segment. When identifying an increase in the capital of a company, it is best to consider a specific example.

It is necessary to refer to the available reporting for several years, which will allow us to visually see the growth / fall in the volume of available capital. If we have identified a sharp increase in this characteristic, then we can conclude that the company is developing successfully.

The key feature is that when calculating the capital gain, not only the company's own, but also the credit money of the enterprise is taken into account. Due to this feature, the actual state of the enterprise may definitely not be correct.

To avoid this development, experts in the financial industry identify capital increases based on the price of the securities of the company in question. This is due to the fact that the price of the company's shares / bonds allows you to specifically determine the net profit of the enterprise.

It is customary to distinguish between several main types of market capitalization, including:

Main forms of capitalization

Modern economic literature distinguishes several forms of capitalization, depending on the means by which funds are used to increase capital. According to this classification, capitalization can be of the following types:

1. Market.
2. Real.
3. Marketing.

Real capitalization reflects the effectiveness of the current economic policy of the company. To calculate it, the growth/decrease of the company's liabilities and assets is taken into account.

Market capitalization is calculated by assessing the growth/decrease in the value of the company's shares/bonds in the stock market.

Marketing capitalization does not reflect the current state of the enterprise, since with this type of capitalization, an increase in volume working capital only happens on paper. Marketing capitalization is, in fact, a ruse that allows you to sell the company for much more than its real value. I hope this material has helped all novice investors understand what capitalization is.

Capitalization- an economic term used in the following meanings:

1. An increase in the volume of the company's own funds as a result of the conversion of dividends, surplus value, all or part of the profit into additional production objects (equipment, means and objects of labor, personnel) or into additional capital. In this case, the essence of capitalization is the transformation of future income into capital. Capitalized funds replenish the fund of capitalist accumulation.

2. Analysis of the value of the company or its property, where the parameters for evaluation are:

The volume of working and fixed capital;

The market value of the securities issued by the company (stocks and bonds);

The amount of profit received each year.

In the banking sector, capitalization consists in issuing shares, increasing operating capital by adding interest rates of return, and other operations to increase the capital base.

Depending on the activities carried out, a distinction is made between capitalization of income (valuation of firms) and market (stock) capitalization of a company (valuation of securities).

In a broad sense, capitalization is the use of free funds (capital) for profit or additional funds. The result of this process is an increase in the volume of own funds or equivalent material values.

To put it quite simply, you invest 100 rubles, get a profit of 50 rubles. In total, you have a capital increase of 50% and you can put the total (capitalized) amount back into circulation in order to get a capital increase more than once. In the end, you are a millionaire.

Varieties of capitalization

A more specific concept of increasing cash flow is inherent in various industries financial activities. For example, the capital gain of an enterprise depends on many factors:

1. The greater the annual profit of the company, the greater the amount of its additional capital. Moreover, the additional financial flow should be aimed at increasing the assets of the enterprise. That is, there is an increase in material values, which allows further development and development of new markets.
2. A high level of profit has an impact on the liquidity of the company's shares.

In order to determine the percentage of market capitalization, it is necessary to conduct an annual assessment financial condition enterprises. If we take the data for several years, we can see a clear upward or downward trend in this percentage.

As for the interpretation of this term by financial and credit organizations, in this case, capitalization is the addition of additional income in the form of interest to the principal amount of invested funds.

There is such a concept in the stock market. Only in contrast to the link to finance or current assets, the percentage of capitalization is calculated based on the increase in the number of securities involved in circulation.

Market capitalization

Market capitalization implies that in terms of value it is possible to estimate the percentage of growth in the money supply of both a single company and any sector of the economy as a whole. Let us consider in more detail the process of determining capital gains in a joint-stock company.

If you take the actual accounting statements for several years, you can see the percentage increase in working capital. Even if there is a trend towards a sharp increase, this does not mean that the company is doing great. The thing is that when calculating capital gains, not only own funds enterprises, but also borrowed (in particular, long-term obligations). This greatly distorts the picture when it is necessary to adequately determine the value of the company for sale.

That is why, when determining the percentage of financial growth, one should rely only on the value of the company's shares, which reflect net profit (), reduced by the amount of debt obligations. Depending on the capital structure of the company, there are several types of market capitalization:

1. Insufficient. This type is characterized by a large amount of borrowed funds, due to which there is a monetary increase. Simply put, the process of increasing capital in this situation is reflected only on paper.
2. Sufficient.
3. Excessive. Excess capitalization is a net accumulation of additional funds that does not go into circulation, but, in fact, lies in the company's asset as a dead weight. That is, the expansion of fixed assets does not occur.

Forms of capitalization

Depending on the means by which the company increases capital, there are three forms of capitalization:

1. Real.
2. Market.
3. Marketing.

Real capitalization is a reflection of how effectively the economic policy of the enterprise is built. To track the distribution and growth of profits, you need to pay attention to the assets and liabilities of the balance sheet. Additional capital is reflected on the right side of the balance sheet, in the liabilities section. Competently placed additional funds must necessarily be reflected in the column that takes into account negotiable or non-current assets. current assets. If the share of fixed assets (that is, the means of production and everything that can bring profit to the company) increases, then the increase in capital falls under the concept of real.

To put it simply, an enterprise that invests free funds for the modernization and expansion of production has every chance to increase capital by increasing turnover and obtaining additional profit. In addition, the company acquires a stronger position in the market, receives a high credit rating and becomes more and more competitive.

Now about what is marketing capitalization. AT modern conditions Few entrepreneurs are involved in building capital in the classical sense. Most merchants tend to show the increase in funds only on paper. That is why the marketing option is also called subjective.

This happens by artificially increasing the value of the company. How can you inflate the value of assets, you ask? Very simple. To do this, it is necessary to reflect the following data on the left side of the balance sheet:

1. Cost of acquired technological developments (know-how).
2. If the company operates under a brand, then you can raise its value.
3. Order an appraiser to calculate the cost business reputation company and the amount received to reflect in the accounting data.

By the way, an increase in assets (the left side of the balance sheet) will automatically be reflected in the column where the cost of additional capital is indicated. Here is the increase in concrete terms. Such measures will help not only to show on paper the increase in the value of the company. This amount can be safely used to increase the authorized capital, which will make it possible to conclude more profitable contracts and receive loans.

Market capitalization is directly related to the stock market. The use of this option is especially popular in Western countries, where everything is based on the concept of stock quotes. In order to calculate the value of the enterprise, it is not necessary to evaluate fixed assets, produce the financial analysis. It is enough to take the value of the share according to the quotes on the day of determination and multiply by the total number of shares of this enterprise.

If in the case of the marketing option, the increase in capital occurs through influence from within the company (the initiative comes from the management bodies), then in the case of the market model, the exchange directly initiates the increase in the value of the company. After all, it is through trading that there is an opportunity to increase the value of shares at the current moment. Therefore, such a market option is also called fictitious.

So, we have established that the numerator can be either the price of one share or the market capitalization of the entire company, and the latter can be calculated both with and without options, but in both these cases we are talking about financial assets company shareholders. This is first.

Secondly, we can take into account all the assets of the company: a good alternative to market capitalization (MC) is the value of the business, denoted either by the abbreviation EV (enterprise value - the value of the enterprise), adopted in the investment banking environment, or by the abbreviation MVIC (market value of invested capital - market value of invested capital) used by professional appraisers. The terms "business value", "enterprise value", "company value" and "market value of invested capital" mean the same thing. In this book, we will use the abbreviation EV. By definition,

EV = MS + D - Cash = (MS + D) - Cash =

MC + (D - Cash) = MV + Net Debt, (8)

where MC, as already mentioned, is the company's market capitalization;

D - market value of long-term debt (including the part that is repaid in the current year);

Net Debt (ND) - net market value of long-term debt;

Cash - liquid funds on the balance sheet (cash, bank accounts, quoted securities, etc.).

If a company has more complex instruments than shares and debt - for example, call options, preferred shares, convertible bonds - then their value should also be taken into account when calculating the value of the business.

In many Western countries, the total debt includes such debts that are not typical for Russia, such as the obligations of the company for pension payments, since they are borne not only by the state, but also by the employer. In this regard, to calculate the net debt, the excess of these liabilities over the corresponding funds is determined, i.e., the amount of underfunding of the funds. Long-term debt also includes deferred taxes. In the case of holding companies that do not own 100% of the shares of their subsidiaries, the concept of "debt" also includes the obligations of the holding to minority shareholders. Long-term debt also includes lease payments, so their capitalized value is also added to the amount of debt.

As can be seen from formula (8), net long-term debt is defined as the total long-term debt minus liquid financial resources on balance. The reduction in the amount of debt by the amount of liquid funds is done, firstly, based on the fact that the company could theoretically pay off part of the debt by parting with cash and investments in securities, and secondly, in order to see how the market evaluates itself a company's business, not its cash holdings. However, we should not forget that a certain minimum of liquid funds of the company is necessary for making current payments and maintaining liquidity. Thus, reducing the debt by the amount of all liquid funds is somewhat of a simplification. Some analysts, including those from leading investment banks, are more conservative in their calculations and do not adjust long-term debt for free cash at all. It should also be taken into account that a reverse adjustment is also possible - in the event that working capital is underinvested.

You also need to pay attention to the fact that companies with low long-term debt and excess cash can have negative net debt. From the point of view of optimizing the capital structure, such a situation is usually considered abnormal, but such companies do occur. In Russia, for many years, such a company has been OAO Surgutneftegaz.

In addition, we should not forget that net debt is recorded at its market value. Long-term debt can exist in the form of loans or bonds. In the case of long-term loans, they are usually not revalued, as their market value is usually the same as the book value or very close to it, and it is not clear how to do such a revaluation. For bonds, they should be carried at market value at the time of valuation.

Let us now look at the formula EU = MU + N0 from the other side. Let's see what the company's balance sheet currency is. A very simplified aggregate balance sheet of a company looks like this:

In terms of liabilities, the balance sheet is the sum of the book value of shares, short-term and long-term debts; and for an asset - the amount of current assets, divided into free cash and non-monetary current assets, and capital assets. Non-monetary current assets mainly consist of stocks of raw materials, work in progress and finished products, in other words, this is revenue tomorrow. When we talk about the value of a business, we mean capital assets, thanks to which this revenue is created daily. It can be roughly assumed that non-monetary current assets are financed by short-term liabilities, and they are approximately equal to each other. If we reduce these parts of the equation (by "equality" we mean the balance sheet), we get the following: Cash + + FA = MC + D (cash plus fixed assets equals the sum of equity capital and long-term liabilities).

FA = MC + D - Cash, (9)

i.e., the value of fixed assets equals the sum of the company's market capitalization and its long-term debt, less liquid cash on the company's balance sheet.

Further, it is assumed that the funds at the disposal of the company are free, i.e., they are not used to finance current activities and, in this sense, they represent reserves. In their economic essence, they are the accumulation of past income, and not a tool for creating new ones. As for the value of the company's business, as we have already said, it is determined only by the value of its capital assets (fixed assets), their ability to generate income. So we get the above formula:

Business Value = Capital Asset Value =

Equity cost + + Long-term liabilities - Cash.

To simplify the understanding of the definition of "business value", we have carried out all our reasoning with the company's balance sheet, in which all assets and liabilities are listed at accounting or book value. In practice, we will be interested in the real or market values ​​of both. If we were to draw up a virtual balance sheet of a company based on the market values ​​of its assets and liabilities, then our capital assets would include the company’s existing investment projects and their prospects would be reflected in the market value of the company's shares. However, the general logic of our reasoning remains true for such an adjusted balance.

So, at comparative evaluation the use of business value (EV) in calculations - as opposed to a direct comparison of the market capitalizations (MC) of the peer company and the company being valued - allows to level the error arising from the difference in the level of debt (which is measured as the share of debt capital in the total financing of the company or as the ratio of "debt / equity" - D / E ratio) and the amount of free cash from the company being valued and a group of peers. These differences - and, accordingly, the error - arise because exact analogues (that is, companies that are similar in all respects to the one being evaluated) are extremely difficult to find. If the analyst, when choosing analogues, also needed to control the levels of debts and free cash of the companies being valued and their analogues (i.e., to select companies with the same capital structure as the one being evaluated as analogues), then this would make his job almost impossible . But, as we found out, for an analog valuation it is not at all necessary to select companies that are similar in this factor, because its impact on the valuation can be taken into account by simple arithmetic operations.

Having first calculated a multiple with the desired denominator and with EV in the numerator, the analyst can then move on to a multiple with MC in the numerator. If EV = MC + ND, then it follows that:

MS = EV - ND = EV + Cash - D. (10)

Thus, the value of a company's shares is the sum of the value of its business and free cash, minus its long-term liabilities.

Now, using abstract examples, we will show how the calculations are done. For simplicity, we will first consider only the difference in cash positions between the company being valued and its peer.

Suppose company A has a balance sheet of $50 and a market capitalization of $200. Company B has a similar business that is expected to generate the same returns to shareholders in the future as company A's business, but it has there is only $100 on the balance sheet. Neither company has long-term debts. It follows from the conditions of the problem that the business of company A is valued by the market at $150 ($200 - $50). Then Company B's business should also be worth $150, but its shares will be $100 more expensive, because they will take into account the value of cash on the balance sheet: 150 + 100 = $250.

Now suppose that all the conditions of the above example remain valid, but company A still has debt of $75, and company B has $90. Then the value of company A's business is: $200 + ($75 - 50 $225) = $225, company B's business value, by analogy, is $225, and the value of its shares is: $225 - ($90 - $100) = $235

The above example clearly shows that based on the assumption that companies A and B have the same businesses, it is impossible to conclude that their shares have the same value, since this value is influenced by both the amount of long-term debt and the company's savings from previous activities. Thus, when evaluating shares, it is desirable to always move from the share price of the analogue to the price of the business of the analogue, and then to the price of the business of the company being valued and, finally, to the price of its shares: P A => EV A => EV B => R B. In other words, if we were to calculate the value of shares through EBITDA, then the formula would look like this: MC B = (EV / EBITDA a) x EBITDA b - ND. There is no mutual exclusion in this: for practical purposes, we usually look for market capitalization, and in intermediate calculations we use the value of the business.