What is market capitalization and how can we calculate market capitalization of a company?

What is Market Capitalization?

Market capitalization, often referred to as “market cap,” is the total market value of a company’s outstanding shares. It’s a key metric used to gauge a company’s size and financial health.  

How to Calculate Market Capitalization?

The formula for calculating market capitalization is straightforward:

Market Capitalization = Number of Outstanding Shares * Share Price  

Number of Outstanding Shares: This is the total number of shares a company has issued to the public.  
Share Price: This is the current market price of one share of the company’s stock.  

Example:
If you would like to calculate market captalization of a company like CEPB for instance you can do it as follows:

Outstanding shares of CEPB = 401,712,926
Current price of CEPB (August 16 2024) = Rs 30

Market Capitalization = 401,712,926 x 30 = Rs 12,051,387,780 (Rs 12 billion)

What Can We Infer from Market Capitalization?

Market capitalization provides valuable insights into a company’s size and relative valuation:

Company Size:
Large-cap: Companies with market caps in the billions or trillions.
Mid-cap: Companies with market caps in the billions.
Small-cap: Companies with market caps in the millions.
Micro-cap: Companies with market caps below a certain threshold.  

Investor Sentiment: A rising market cap often indicates positive investor sentiment and expectations of future growth. Conversely, a declining market cap may signal concerns about the company’s performance.

Valuation: Market cap can be used in conjunction with other metrics like earnings per share (EPS) to calculate price-to-earnings (P/E) ratio, which helps assess a company’s valuation relative to its earnings.