Market Capitalization Formula

Market Capitalization Formula (Table of Contents)

Market Capitalization Formula
Examples of Market Capitalization Formula (With Excel Template)
Market Capitalization Formula Calculator

The term market capitalization means the total value of a particular company if it sells all its shares in the stock market at the current market price. The formula of market capitalization is as follows:

Market Capitalization = Total Number of Shares Allotted by the Company * Current Market Price of each Share

Examples of Market Capitalization Formula (With Excel Template)

Let’s take an example to understand the calculation of Market Capitalization formula in a better manner.

You can download this Market Capitalization Template here – Market Capitalization Template

Market Capitalization Formula – Example #1

ABC limited has equity shares of 1, 00,000 which is listed in the stock exchange. The current market price of each share is INR 25.30. Calculate the Market Capitalization of the Company.

Solution:

Market Capitalization is calculated using the formula given below

Market Capitalization = Total Number of Shares Allotted by the Company * Current Market Price of each Share

Market Capitalization of ABC Limited = 1,00,000 * 25.30
Market Capitalization of ABC Limited = INR 25, 30,000

Market Capitalization Formula – Example #2

Market Capitalization of VIP Industries is INR 7136.52 Cr. Find out the Number of Shares trading in the Stock exchange if the Current Market price of each share is INR 496.2.

Solution:

As per the formula, we know that,

Market Capitalization = Total Number of Shares Allotted by the Company * Current Market Price of each Share

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Total Number of Shares is calculated using the formula given below

Total Number of Shares Allotted by the Company = Market Capitalization / Current Market Price of each Share

Total Number of Shares Allotted by the Company = INR 7136.52 Cr / 496.2.
Total Number of Shares Allotted by the Company = 14.3823 shares

The total outstanding share of VIP industries is 14.3823

Market Capitalization Formula – Example #3

Pritish Nandy Communications has equity shares of 14, 47,00,000 which is listed in the NSE and BSE stock exchanges. The current market price of each share is INR 18. Calculate the Market Capitalization of the Company.

Solution:

Market Capitalization is calculated using the formula given below

Market Capitalization = Total Number of Shares Allotted by the Company * Current Market Price of each Share

Market Capitalization of Pritish Nandy Communications = 14,47,00,000 * 18
Market Capitalization of Pritish Nandy Communications = INR 2604600000

Explanation

Market capitalization indicates the value in terms of money if all the shareholders want to liquidate their position after selling the stock holding at a particular point of time.

One of the characteristics of market capitalization formula is that it indicates the financial power of the company.

For example, if the base price of a stock is INR 10 and the stock prices quoting at INR 90 then the company’s business has proved to be strong and hence it is given a return 9 times more than its base price of INR 10. This indicates that a company’s business is ever-growing and the reserves and the profitability have grown over the years.

If a company is growing at the steady pace it is assumed that the equity share of the particular company will grow at the same pace or at a page which is more or less equal to the growth of profitability of the company. Thus if a company’s share price is growing constantly it indicates healthy business activity of that particular company. On the other hand, if a company’s share price is declining it is more or less assumed that the company’s growth has been handed or it is making losses in current quarters.

The profitability of the company is directly linked with the market capitalization of that particular company.

Earnings per share EPS is obtained by dividing the total profitability of the company within a particular tenure divided by the total number of outstanding shares which are trading at the stock market. So if the total profitability increases or decreases the EPS will increase or decrease accordingly.

Again in most of the profitable companies, we see that the total profit is way less than the total market capitalization of the particular stock. This is because the market tends to discounts shares with few multiples of the EPS when they are traded in the market. So EPS * Price to Earnings multiple is equivalent to the current stock price.

The PE multiple is a request to the current price of the stock / EPS.

Relevance and Uses of Market Capitalization Formula

When a particular business is valued, the common base which is being taken is the market capitalization of the particular company as it is the value which is given by the traders and the investors depending upon the meter of business and quality of business of the particular stock.
Over the tenure of 10 to 20 years, a good business has always generated higher market capitalization as its profit-making ability with it P/E multiple has always been up trending. With the increase of market participants, the P/E multiple gets higher as it indicates that more investors are willing to invest in that particular Company.
The reverse is also true. Which means that if a business is not profitable and the dynamics are negative, then the market will not give a higher multiple and the stock price will tend to fall with time? Again if the growth of the company is shrinking, then it will relatively affects the stock price as the PE multiple will decrease along with the price of the stock.
When particular company things for an acquisition of a particular company, be it in the same segment or for the purpose of diversification, the Analysts tend to compare its profitability with the market capitalization so as to get the P/E multiple and hence the value of the business. The higher P/E multiple suggests higher valuation for the particular business and lowers P/E multiples denotes lower growth of the business.