What Is the Difference Between Market Capitalization and Revenue?
There are many methods used to estimate a company's worth, and the accurate appraisal of a company's value affects many financial decisions. Market capitalization and revenue are two of the simplest metrics used for value estimation, but they are often frequently misunderstood.
Key Takeaways:
- Market capitalization and revenue are two metrics used for value estimation
- Market capitalization reflects the total value of a company based on its stock price.
- Revenue is the amount of money a company earns as a result of sales.
- It is possible for a company to have a large market cap but low revenues.
Understanding the Difference Between Market Capitalization and Revenue?
Market capitalization reflects the total value of a company based on its stock price. It is calculated by multiplying the number of shares outstanding with the share price. For example,if Company A was trading at $40 per share and had a million shares outstanding, the market capitalization would be $40 million ($40 x 1 million shares).
Revenue, on the other hand, has nothing to do with the share price. Revenue is the amount of money a company pulls in as a result of sales. It is possible for a company to have a large market cap but low revenues.
Internet startups are cases in point. If they are considered to have potential by the market, their stock might be in demand and priced high even if they are not yet showing high sales. It is also possible for a company to have a low market cap and huge revenues. For example, a large car manufacturer could be running at a loss despite substantial revenues and be on the verge of bankruptcy. In this case, there would be little demand for its shares, and the share price would be low.
Market Capitalization
Market capitalization, or market cap, is essentially the amount of money it would take to purchase an entire company based solely on its stock price. As the shares outstanding and the stock price fluctuate, so does the market cap.
Market cap provides a simplistic view of a company's value as it does not take into account outstanding debt, long-term growth potential, or the company's liquid assets. The stock price is a reflection of the price that the public believes shares in the company to be worth at a point in time. Market cap can be a useful metric as it incorporates company reputation and public sentiment.
Revenue
While revenue is just as simple, it has onlyoneinterpretation. Revenue is simply the amount of money flowing into a company as a result of the sale of goods and services. Revenue is the top line of an income statement. It is the total sum of positive cash flow. All overhead, administrative and operational expenses are deducted from this amount to arrive at the net profit. However, sales tax is not included in revenue figures; it is collected by companies on behalf of the state and is not considered to be income.
Investors will often consider a company's revenue and net income separately to determine the health of a business.
FAQs
Market capitalization and revenue are two metrics used for value estimation. Market capitalization reflects the total value of a company based on its stock price. Revenue is the amount of money a company earns as a result of sales. It is possible for a company to have a large market cap but low revenues.
How do you compare market cap to revenue? ›
The price-to-sales ratio (Price/Sales or P/S) is calculated by taking a company's market capitalization (the number of outstanding shares multiplied by the share price) and divide it by the company's total sales or revenue over the past 12 months. 1 The lower the P/S ratio, the more attractive the investment.
Are revenue and market size the same? ›
Revenue is Higher than Market Size.
For large diversified firms, that can be quite challenging and quite often this means a large firm that represents a very large revenue base, is automatically summed as part of it's primary classification.
Can a company's revenue be more than its market cap? ›
If a company's sales are greater than its market capitalization, it can indicate that the market may be undervaluing the company. Market capitalization is the value of a company as determined by the stock market, and it is calculated by multiplying the current stock price by the number of outstanding shares.
What is a good market cap to revenue ratio? ›
A low Market Capitalization to Sales ratio below one or two is generally considered good. The lower the ratio, the better it is. Many investors used this metric as the company's profits are easy to manipulate, but sales are hard to manipulate. It tells how the market is pricing every rupee sale of the company.
What is the difference between market cap and revenue? ›
Market capitalization and revenue are two metrics used for value estimation. Market capitalization reflects the total value of a company based on its stock price. Revenue is the amount of money a company earns as a result of sales. It is possible for a company to have a large market cap but low revenues.
What is the difference between market capitalization and turnover? ›
Market capitalization (% of GDP) (also known as market value) is the share price times the number of shares outstanding. Turnover (% of GDP) refers to the total value of shares traded during the period.
Can sales be greater than market cap? ›
Companies with their Sales in a year being greater than their Market Cap filters out companies that are doing good and the future earnings haven't been factored in.
What is the meaning of market capitalization? ›
Market cap, or market capitalization, is one way of measuring a company's total value, based on outstanding shares of stock. A company's market cap will fluctuate with its share price. Investors can use market cap to gauge public interest and company strength.
Is market price the same as total revenue? ›
That is, there is exactly one price that it can sell at – the market price. At any lower price it could get more revenue by selling the same amount at the market price, while at any higher price no one would buy any quantity. Total revenue equals the market price times the quantity the firm chooses to produce and sell.
Price–sales ratio, P/S ratio, or PSR, is a valuation metric for stocks. It is calculated by dividing the company's market capitalization by the revenue in the most recent year; or, equivalently, divide the per-share stock price by the per-share revenue.
What is the difference between net income and market cap? ›
Net income is the profit a company earns from its operations. When net income is retained by a company instead of being distributed to shareholders as dividends, it adds to the shareholders' equity. Market capitalization, on the other hand, is the total value investors place on the company's outstanding stock.
Is a market cap how much a company is worth? ›
Market capitalization shows how much a company is worth as determined by the total market value of all outstanding shares. To calculate a company's market cap, multiply the number of outstanding shares by the current market value of one share.
What is a decent market cap? ›
Sizing up stocks
Large-cap: Market value of $10 billion or more; generally mature, well-known companies within established industries. Midcap: Market value between $3 billion and $10 billion; typically established companies within industries experiencing or expected to experience rapid growth.
What does p/s ratio tell you? ›
The price-to-sales (P/S) ratio shows how much investors are willing to pay per dollar of sales for a stock. The P/S ratio is calculated by dividing the stock price by the underlying company's sales per share.
What is ideal price to revenue ratio? ›
While the ideal ratio depends on the company and industry, the P/S ratio is typically good when the value falls between one and two. A price-to-sales ratio with a value less than one is better.
How is market cap calculated from revenue? ›
To calculate a company's market cap, multiply the number of outstanding shares by the current market value of one share. Market cap is used to determine a company's size, and then compare the company's financial performance to other companies of various sizes.
What is a good valuation to revenue ratio? ›
Range Indicator of Enterprise Value to Revenue Ratio
| Range | Indicator | Comments |
|---|
| 3 to 4 | Neutral | Rightly Valued |
| 4 to 6 | Mild Bearish | Overvalued |
| 6 to 8 | Bearish | Highly Overvalued |
| Above 8 | Strong Bearish | Extremely Overvalued |
3 more rowsRevenue Multiple = a company's market cap ➗ its total revenue in the last year, or TTM revenue. Fastly is a software company that did ~$500M in revenue in the last year, and has a market cap of about $2.5 billion.
