In many areas of the finance sector, including economics, accounting and investing, accurately assessing the value of a company can be of utmost importance. There are numerous ways to measure company size and value depending on the situation. However, because the word “value” gets used so frequently, there can be some confusion. Two such misleading terms are market capitalization and market value. While each term is a measure of company assets, it is vastly different in its calculation and precision.
Market capitalization, or market cap, is a very simple metric based on stock price. To calculate a company’s market cap, simply multiply the number of shares outstanding by the current price of a single share. For example, a company with 50 million shares and a stock price of $100 per share would have a market cap of $5 billion. This definition of company “value” is often used in the investment sector to determine the size and strength of a company when analyzing potential trade opportunities.
Confusion stems from the fact that market capitalization is essentially a synonym for market value of equity. However, these concepts are simple calculations based on assets only. While market cap is often referred to as a company’s value, true market value is infinitely more complex. Market value is assessed using numerous metric and multiples, such as price-to-earnings, price-to-sales and return-on-equity. These different metrics take into account several factors in addition to stockholder equity, such as outstanding bonds, long-term growth potential, company debt, taxes and interest.