Market capitalization specifies the total market value of a listed company. For a listed company, it is calculated after multiplying the share price with the total number of shares. For privately held companies, the market capitalization can be calculated from the total asset value or the future cash flows to the firm. The calculation methodology for the unlisted private companies is very tough and not straight forward.
Some important aspects of market capitalization
As the market capitalization refers to the total market value of a company, it also denotes the minimum amount to be spent to acquire the company keeping synergy values separate.
Market capitalization can never be matched with the revenue of the company. A company’s revenue may be less but it can have a very high market cap because of huge assets and very good growth potential in future.
Same way, a company’s revenue may be high but it can have a very less market cap because of high liabilities or debt and some short term issues related to the business operation or decreased investor confidence.
As the market share price is driven by the market condition (bull and bear), the market cap also varies significantly with the market condition. During the bull market it normally stays high and during bear market, it normally stays down.
As during the bear market the market cap reduces significantly, it makes a company potential takeover target because of cheap pricing.
Market cap is also associated with the investor confidence as it drives the share price in the market.
For privately held companies, the total market cap can be calculated based on any recent transaction or stake sale. Like an example if a private equity firm buys 5% stake of a company at around USD 100 million then the total market cap of the company will be around USD 2000 million or USD 2 billion.