What is Market Cap?
The Market Cap—or “Market Capitalization”—is the total value of a company’s equity from the perspective of its common shareholders.
Often used interchangeably with the term “equity value,” a company’s market capitalization measures the value of its common equity as of the latest market close.
- The market cap, short-form for “market capitalization”, is the total value of a company’s common shares outstanding to its equity holders.
- The market cap measures the value of a company’s common equity as of the latest market closing date.
- The formula to calculate a company’s market capitalization multiplies the total number of diluted outstanding shares by the latest market price at the present date.
- The difference between the market capitalization and enterprise value is that the market cap reflects the value of only the equity of the company, rather than all capital sources such as debt.
Table of Contents
- How to Calculate Market Capitalization
- Market Cap Formula
- How to Calculate Market Capitalization from Enterprise Value
- Enterprise Value vs. Market Value of Equity: What is the Difference?
- Zoom (ZM) vs. Largest Airlines: Market Cap Analysis Example
- Market Capitalization: What are the Different Categories?
- Market Cap Calculator
- 1. Stock Price and Shares Outstanding Assumptions
- 2. Market Cap Calculation Example
- 3. Equity Value to Enterprise Value Bridge
- 4. Market Capitalization Calculation Example
How to Calculate Market Capitalization
The market capitalization metric, often abbreviated as “market cap”, represents the total value of a company’s equity, most often measured to analyze the valuation of publicly-traded companies.
Otherwise, if the company is private – i.e. if its shares of ownership are not publicly traded on the stock markets – the value of its equity should be referred to as equity value instead.
When equity analysts and investors discuss the value of companies, two of the most frequently used terms are “equity value” and “enterprise value”, which are briefly explained below:
- Equity Value (Market Capitalization) ➝ The value of the company to the owners of its common equity (i.e. the common shareholders)
- Enterprise Value (TEV) ➝ The value of the operations of the company to all stakeholders – or, said differently, the value of a company’s operating assets minus its operating liabilities
Enterprise Value vs. Equity Value Illustration
Market Cap Formula
To calculate the market capitalization of a company, the company’s latest closing share price is multiplied by its total number of diluted shares outstanding.
Where:
- Latest Closing Share Price ➝ The market price of the company’s equity is expressed on a per share as of the present date or the latest closing date.
- Total Diluted Shares Outstanding ➝ The common share count is determined on a fully diluted basis, which means the potential net dilution of options, warrants, and other mezzanine financing instruments like convertible debt and preferred equity securities were incorporated via the treasury stock method (TSM). If not, there is the risk that the market capitalization calculated is lower than it actually is, as there would be share issuances left unaccounted for.
How to Calculate Market Capitalization from Enterprise Value
Under an alternative approach, we can calculate the market cap by subtracting net debt from the enterprise value of the company.
For privately held companies, this particular approach is the only viable method to compute equity value, as these companies do not have a readily available public share price.
To get from the enterprise value of a company to its equity value, you must first subtract net debt, which can be calculated in two steps:
- Calculate Gross Debt → Gross debt is the sum of all debt and interest-bearing securities
- Subtract Cash and Cash Equivalents → Net debt is equal to gross debt deducted by cash and highly liquid, cash-like assets such as marketable securities and commercial paper.
Where:
- Net Debt = Gross Debt – Cash and Cash Equivalents
In effect, the formula isolates the value of the company belonging solely to common equity shareholders, which should exclude debt lenders, as well as preferred equity holders.
Under the treasury stock method (TSM), the common share count factors in the exercise of potentially dilutive securities, resulting in a higher number of total common shares.
While the treatment of these securities can be specific to the firm or individual, if an option tranche is “in-the-money”—i.e. there is an economic incentive to execute the options—so, the option or related security is assumed to be executed.
However, in recent years, the industry norm has shifted towards more conservatism by taking into account all potentially dilutive securities issued, no matter if they are currently in or out of the money.
The proceeds received by the issuer as a result of the exercise are then assumed to be used to repurchase shares at the current share price, which is done to minimize the net dilutive impact.
Enterprise Value vs. Market Value of Equity: What is the Difference?
The difference between the conceptual meaning of enterprise value (TEV) and the market value of equity (MVE) is as follows.
- Enterprise Value (TEV) → The enterprise value is the value of the operations of a company to all capital providers with claims, such as common shareholders, preferred shareholders, and lenders of debt.
- Market Value of Equity (MVE) → On the other hand, the market value of equity, or “equity value”, represents the residual value left to only equity holders.
While enterprise value is considered “capital structure neutral” and unaffected by financing decisions, equity value is directly affected by financing decisions (post-interest). Therefore, enterprise value is independent of the capital structure, unlike equity value.
