Market Capitalization

Market capitalization is the total value of a company’s outstanding shares in the market. This figure reflects investor expectations regarding a company’s future earnings and growth.

What Are the Types of Market Capitalization?

• Strategic value — the calculated value of a company for a specific potential buyer, taking into account synergies or acquisition motives.
• Market value — the current value of the company on the market based on its share price.
• Book value — the value of the company’s assets minus its liabilities.

Methods for Estimating Market Capitalization

To assess market capitalization, various methods are used — such as comparative, income-based, and cost-based approaches. The chosen method depends on the context, and they are often combined. Let’s look at each method in more detail.

• A cost-based approach shows how much money the owner could receive by selling all assets and repaying debts. To apply this approach, determine the market value of each asset and subtract all liabilities. Who can use this method? It is suitable for companies with tangible assets — such as equipment, real estate, or transport. For example, there is an IT company. It has no physical assets and operates remotely using employees’ personal equipment, so the cost-based method becomes irrelevant. In that case, such a method is useless; it is better to use income-based and comparative approaches.
• An income-based approach considers future profits, adjusted for inflation and risk. It is useful for companies with stable growth potential. The calculation formula is very simple: Company Value = Net Operating Income / Capitalization Rate
• A comparative approach uses data from similar companies in the market. It is considered the most used, as it relies on data about competitors. When using this method, you can divide the business value of an analog company by one of the financial indicators.

The latter often relies on ratios such as Price-to-Revenue or Price-to-Operating-Profit. If financial data is unavailable, alternative metrics can be used. For example, for a café — number of seats; for a dental clinic — number of dental chairs.

Practical Example

Let’s consider a dental clinic that has been operating for seven years. Over the last four years, its profit has steadily increased by 7% annually. The clinic has 15 dental chairs. In 2024, it took out a bank loan to purchase a second building in the city center. Convenient location, large flow of people, close to the metro.

So how can the clinic’s market value be calculated in this case? In all three ways:

• Cost-based — because the clinic owns valuable property and equipment.
• Income-based — due to its stable and growing profits;
• Comparative — since there are many similar clinics in the market.

The Main Things to Remember About Market Capitalization

1. Valuation is typically performed in cases of sale, bankruptcy, or liquidation — and market capitalization may be part of that analysis.
2. To assess ‌market capitalization, three main approaches are used — cost-based, income-based, and comparative. Depending on the purpose, one or a combination of them may be applied.