Avancee ResearchTM
What matters other than “Quality”?
Sample Content Project on
Market Capitalization & Enterprise Value
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What matters other than “Quality”?
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What matters other than “Quality”?
Market Capitalization
 Also known as Capitalization or Market Cap
 A measurement of a public listed company’s
worth, value or size in terms of its shares
 Equals to the value obtained by multiplying the
total number of shares outstanding of a
company with its current share price
Market cap = Current share price X No. of shares outstanding
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What matters other than “Quality”?
Market Capitalization
• Depending on the value of market cap, a company
will be categorized either under small-cap or midcap or large-cap
• Normal Ranges of market caps:






Mega-cap: Over $100 billion
Large-cap: $10 billion–$100 billion
Mid-cap: $1 billion–$10 billion
Small-cap: $100 million–$1 billion
Micro-cap: $10 million-$100 million
Nano-cap: Below $10 million
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What matters other than “Quality”?
Why Market Capitalization?
• Market capitalization will help an investor to
decide whether to invest in a particular
company or not
• It also shows the worth of a company in the
current market
• Used
to
calculate
“free-float
market
capitalization”
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What matters other than “Quality”?
Free-float Market Cap
• In order to understand the concept of free-float market
cap, we first need to know some terminology such as
“open market”, “free-float”, “free-float factor” etc.
• Shares in a company may be owned by various types of
investors such as Directors, Founders, Employees,
Government, or FDI’s
• A company may have few shares in the open market,
and few shares which can’t be traded in the open
market
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What matters other than “Quality”?
Free-float Market Cap
• The company can only trade its shares in the “open
market” which are not owned by any investors
• Open market shares which are free for trading by
anyone are called free-float shares
• In general, companies will disclose all the data
relating to ownership of its shares to respective
stock exchanges where they are listed
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What matters other than “Quality”?
Free-float Market Cap
• Stock exchanges will decide the free-float factor
of a company based on the free-float shares
• Value obtained by multiplying free-float factor
with market cap of a company will give the
“free-float market cap” of a company
Free-float market cap = Free-float factor X market cap
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What matters other than “Quality”?
Application of Free-float market cap
• Free-float market cap is used to determine the
SENSEX value.
• In BSE, sum of top 30 companies’ free-float market
cap will be taken to calculate the sensex value (30
companies may vary from time to time, and index
committee will decide the 30 companies to be
considered for calculating the sensex)
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What matters other than “Quality”?
Application of Free-float market cap
 For Example: Assume on December 29, 2010, the
sum free-float cap of 30 companies in BSE is
INR1000 million and sensex is 20,000 points
On December 30, 2010, if the free-float cap would
be INR998.5 million, then sensex is calculated
(model of relative mathematics) as
SENSEX =998.5 X 20,000 = 19,970 points
1000
Note: BSE has taken Base Sensitive Index as 100
points w.e.f April 1st 1979
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What matters other than “Quality”?
Enterprise Value (EV)
• Enterprise Value (EV) measure the total value of the
company and is an alternative to the market
capitalization.
• EV is the most comprehensive measurement for the
market value of the company which considers the
claims of all security-holders such as debt holders,
preferred shareholders, minority shareholders,
common equity holders, and others while calculating
unlike the market capitalization which only includes
common equity
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What matters other than “Quality”?
Enterprise Value (EV)
• Enterprise Value (EV) = market cap + debt + minority
interest + preferred equity – cash and cash
equivalents.
• All the components in the calculation are taken at
market value, not at book value.
• This is more transparent measurement which can
give an acquirer the most exact market value of a
company it is going to acquire including its debt.
Thus EV give more accurate takeover valuation.
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What matters other than “Quality”?
Enterprise Value (EV)
 Minority interest is added that represents claim
on assets consolidated into the company
 Since cash is paid out as dividend or used to pay
down debt, it reduces the net cost to a potential
purchaser; hence cash and cash equivalents are
substracted when calculating EV
 EV can be negative when cash in a company is
more than the value other components of EV
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What matters other than “Quality”?
Applications of EV
• As a capital structure-neutral metric, EV is used
to compare the companies with different capital
structure
• EV/EBITDA ratio is used by stock investors to
compare the return between equivalent
companies
• EV is also used to compare the returns between
the companies by buyers of controlling interests
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