Capitalization

Capitalization is also known as “market cap.”The sum of a business’s long-term debt, stock and retained earnings. Capitalization is basically a measurement of a company’s value and size. The measurement is different from equity value since a firm has securities and stock options than can be converted into common shares. One of the measurements of a public company’s success or failure is looking at the size and growth of its market cap. Sometimes a company’s market cap can fluctuate for unknown reasons that have no relation to the performance of the business such as acquisitions, divestitures, and repurchases.

To measure market capitalization, you must take the number of common shares and multiply it by the price of the shares. Then debt must be added into the equation along with the preferred stock. This will give you the amount of capital used to finance the balance sheet of a company. Since capitalization is calculated by using the current value of the stock, it may not accurately reflect in the true intrinsic value of the company due to the changing expectations of investors. If the stock price is inflated due to high expectations of the business by investors, it might make the company seem in better shape than it actually is. If the stock price is undervalued by investors, it may make the company seem in worse shape than it truly is.

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