Measurement of size- market capitalization

Now Let us forget about ratios and concentrate on another important aspect.Size.

If I tell you the price of two companies – say, company A Rs 150 and company B Rs 75. would you be able to tell me which is the bigger one? Is it company A? No. why? because, you cannot guess the size of the company by looking at it’s share price.

So, the question is how to measure the size.The answer lies in finding out something called “Market capitalization” of that company.

Market capitalization or market Cap is calculated by multiplying the current stock price by the number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

For Example: A stock trading at Rs 55 with 100,000 outstanding shares would have a market cap of Rs 5.5 lakhs.

Since the per-share price keeps changing and since each company has a different number of outstanding shares, the market capitalization of a company keeps changing everyday.

Here’s an example: lets’s take tw companies – A ltd and B ltd

A Ltd’s Stock price: Rs 50 Outstanding shares: 50 Lakhs

So , Market cap works out to : Rs 50 x 50,00,000 = Rs 2500,00,000

B Ltd’s Stock price: Rs 10 Outstanding shares: 3 Crores

So Market cap works out to : Rs 10 x 300,000,000 = Rs 30000,00,000

This is how you should look at these two companies for evaluation purposes. Their per-share prices tell you nothing by themselves. This is exactly why Reliance industries with a share price of Rs 1100 is a bigger company than say, MRF Ltd whose share price is around Rs 7500.

Having said that, let us look into how the companies are classified according to its market capitalization.

LARGE CAP

There is no standard definition of Large Cap and it varies from institution to institution. But as a general rule, in India, if a company has a market capitalization of more than Rs. 5000 Crores, it is considered as a Large Cap.

A Large Cap company is normally a dominating player in its industry, and has a stable growth rate.

It should be noted that almost all the Large Cap companies from India would be considered as Mid Cap or Small Cap companies in a global scenario, as globally, companies are usually classified as Large Cap if their market cap is more than $10 Billion (roughly Rs. 39,000 Crores).

MID CAP

If a company has a market capitalization of between Rs. 1000 Crores and Rs. 5000 Crores, it is considered as a Mid Cap

A Mid Cap company is normally an emerging player in its industry. Such a company has a potential to grow fast and become a leader (a Large Cap) in the future.

Mid cap companies can show very high growth rates (in percentage terms), because they have a small base – since their size is small, even a small incremental increase in revenue / profits can be a big figure when expressed in terms of percentage.

SMALL CAP

If a company has a market capitalization of less than Rs. 1000 Crores, it is considered as a Small Cap

A Small Cap company is normally a company that is just starting out in its industry, and has moderate to very high growth rate. Such a company has a potential to grow fast and become a Mid Cap in the future.

CONCLUSION

Focus on the market cap to get a picture of the company’s value in the market place. Per share price may not give you the actual picture about the company’s size .

You may like these posts:

  1. What is Sensex? How is it calculated?
  2. Understanding Earnings Per Share (or EPS)

2 Responses to “Measurement of size- market capitalization”

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