Market Capitalization & Enterprise Value and Calculation

What is Market Capitalization (Market Cap)?

·       Market Capitalization (Market Cap) is the amount of money required to buy out an entire company at its current market price. It is computed as the market price per share of the company multiplied by the total number of outstanding shares.

·       For instance, a company that has issued 1 Lakh shares and currently trades at Rs. 30, the Current Market Price, would have a Market Cap of Rs. 30 Lakh (1 Lakh * Rs. 30). With changes in equity prices, the market capitalization of the companies keeps changing.

Market Cap Mostly classifies traded Stocks.

·       Blue-chip stocks represent the most prominent companies by market cap. With the given large size of their market cap, they attract many investors, both institutional and retail, and utilize a high level of liquidity. These are also called large-cap stocks.

·       Mid-cap stocks refer to those companies which enjoy a good level of liquidity but are medium in terms of market capsize.

·       Small-cap stocks are those stocks that are smaller in size and, for that reason, do not enjoy much liquidity.

·       There is no exact size for the cut-off of large, mid, or small-cap stocks. It is for that reason common to consider the top 50 to 100 stocks by market capitalization as large-cap, the next 200 to 500 stocks as mid-cap, and the remaining all as small-cap stocks.

·       Market cap is also used as an indicator of the size and significance of a country's stock market. The market cap ratio to a country's GDP is appropriate for a reason.

What Is Enterprise Value?

·       Enterprise Value (EV) is the notional takeover price of a firm. Besides Equity, it considers the debt and cash reserves of the company in formatting its value.

·       It is assumed that the company's debt is a liability that also has to be taken over and accounted for in the price by the acquirer, despite the fact that the cash reserves are available to the buyer and consequently deducted from the total value.

EV May Be Defined Mathematically As Mentioned Below:

·       Enterprise value = Market capitalization – cash and cash equivalents, where the Market capitalization is the "Market value of equity Market value of debt."

·       Market Capitalization is derived by multiplying the market price by the number of outstanding equity shares.

·       The market value of debt is, in general, taken as outstanding debt on the balance sheet of the company.

·       This cost is limited by any cash or cash equivalents on the balance sheet, which will be available to pay out business debts. This is the price of the entire firm to a buyer.

For Instance, Let Us Calculate the EV Of A Company With The Information Below:

Market Cap = 20 Lakh

Total Debt = 3 Lakh

Cash = 4 Lakh

Subsequently, EV = 20 Lakh + 3 Lakh – 4 Lakh = 19 Lakh