Market Capitalization vs. Market Value

Market value and market capitalization are two frequently used – and usually confused – terms when discussing the profitability and viability of companies.

Market Capitalization

Market capitalization, or market cap, is a simple indicator based on stock price. A company’s market capitalization is calculated by multiplying the number of shares outstanding by the current price per share. For example, a company with 50 million outstanding shares and a share price of $100 per share would have a market capitalization of $5 billion. Market capitalization is essentially a synonym for the market value of equity.

Market Value

While market cap is often referred to as the value of a company, or what a company is worth, determining the true market value of a company is much more complicated. It is determined by the valuations or multiples that investors attribute to companies, such as price to sales, price to earnings, enterprise value to EBITDA, etc. These various metrics take into account several factors in addition to shareholder equity, such as outstanding bonds, long-term growth potential, company debt, taxes, and interest payments. The higher the valuation, the higher the market value.