The capitalization of a company (or market capitalization) is the amount reflecting the total value of the company in the market. This indicator is calculated by multiplying the current market price of a share by the total number of shares issued. Capitalization allows investors to assess the size and relative position of a company in the market.
Capitalization may change over time depending on fluctuations in the share price, which may reflect the successes or failures of the company, changes in the industry and the economy as a whole.
At the time of entering the stock market (exchange), the company's capitalization corresponds to the value of IPO, for which the owner puts it up for auction at face value. It usually corresponds to the net asset value of the company.
The relationship between capitalization and net assets
The net assets of a company represent the difference between its assets and liabilities. This indicator helps to estimate how much a company would really be worth if its assets were liquidated. Net assets include all physical and financial assets, minus debts and other liabilities.
The capitalization of a company and the value of its net assets can vary significantly. For example, a high capitalization may indicate investor confidence in future earnings, but this does not always reflect the real value of the company, estimated through net assets. If the capitalization significantly exceeds the net assets, this may indicate the overvaluation of the company and potential risks for investors.
On the other hand, in the case when the capitalization is below the value of net assets, this may indicate an undervaluation of the company. Investors may consider this situation as an opportunity to purchase shares at a bargain price.
In other words, capitalization is the market value of a company that is determined by the markets taking into account objective factors (the value of real assets, potential), and the value of net assets is just the book value of the company at the current time, which is determined by the difference in the value of all assets and debts.
Usually, the difference between the capitalization of a company and the value of its book value (net assets) leads either to an increase in investment expectations, or, conversely, when the real value of the company does not correspond to the market value, which may indicate the risks of accumulated losses.