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It is calculated by multiplying the number of outstanding shares by the current market price of one share. In the investment community, it is common to use this indicator as a criterion for the size of a company, instead of less convenient parameters such as sales volume or total asset value.

Reflecting the size of the company is an important function of this indicator, since a large number of characteristics that interest investors depend on it. This parameter is easy to calculate: if a company offered 20 million shares for sale at a price of $100 per share, then its market capitalization is $2 billion.

Given the metric's simplicity and usefulness in assessing risk, traders and investors can easily use it to find interesting stocks and diversify their portfolio by including companies of different sizes.

Large-cap companies are typically those with a market capitalization of $10 billion or more. Most of them have been in the market for a long time and play an important role in established industries. Investing in shares of such companies does not always bring high returns over a short period of time. However, in the long term, these corporations reward their investors with stable share price growth and regular dividend payments. An example of a large-cap company is International Business Machines Corp.

For mid-cap companies, this parameter usually ranges from 2 to 10 billion US dollars. These are established companies from which rapid growth can be expected. Mid-cap companies are in the process of expansion. The risks when working with them are higher than when working with highly capitalized corporations, since they are not so established. But they have good growth potential. An example of a mid-cap company is Eagle Materials Inc.

Companies with market capitalizations between $300 million and $2 billion are generally classified as small-cap companies. These are small and often young companies operating in niche markets or new industries. Given the age of these companies, their size and scope of activity, investing in them is considered quite risky, since small companies with limited resources are more sensitive to economic downturns.

Misconceptions About Market Capitalization

Market capitalization does not indicate how much a company might be worth in the event of an acquisition. The price of purchasing a business is better reflected by an indicator such as enterprise value.

Change in market capitalization

• significant change in share price;
• additional issue or repurchase by the company of its shares.

Today the word “capitalization” can be heard quite often in economic news. Its main indicators are considered to be two: growth or decline.

There is an opinion among economists that a company's capitalization is a kind of its value. It should be noted that these two indicators are in direct proportion. So, the higher the capitalization, the more expensive the company. When the capitalization rate decreases, value is lost.

A company's capitalization is the value of its shares on the stock exchange. For example, with the active purchase of shares, the value of the enterprise increases. An interesting feature of these securities is that the business entity itself has nothing to do with them. The only thing he can do is buy them back (often this is what happens). In this case, the shares may not be accompanied by However, they are always a kind of “product”.

The analysis showed a small number of studies in the field of capitalization. It is mainly viewed from the point of view of growth. The main emphasis is on joint stock companies due to the presence of their shares in free circulation. Their value is assessed on the basis of such securities.

The domestic market shows that a company's capitalization is an indicator that should be assessed based on foreign practice. Due to its limited scope of application, capital in joint stock form has not become widespread. Therefore, with this approach, there is a possibility that a significant part of Russian enterprises will drop out.

Based on the research of domestic scientists (for example, Galtseva E.V.), the scientific literature has formed a rating of company capitalization, depending on the various forms of its manifestation in the domestic market. Thus, based on the mechanism of increasing capitalization, we can distinguish its three main forms (real, subjective and fictitious (market)). All of these forms must be reflected in the third section of the enterprise’s balance sheet as an increase in its own sources for financing. At the same time, they have different sources of origin and initiation. Let's take a closer look at each form.

Real capitalization of the company

This is a reflection in the reporting of the natural result of its financial and economic activities. Thus, an efficiently operating enterprise always has a positive result from its core activities. An increase in a company's capitalization indicates its ability to generate its revenues and subsequently expand its business and achieve higher profitability in the future.

Subjective capitalization

In this case, it is controlled by internal management. Costs are of a subjective (negotiable) nature. Therefore, an increase in the value of property can be considered a subjective operation, since capitalization formed in this way can disappear at any time (changes in market conditions or the political situation in the country).

Fictitious (market) capitalization

The capitalization of a company is its which is represented by the product of the price of shares and their total number (R. Koch). The increase in such value is reflected in the balance sheet (in the asset). The main difference between this form of capitalization and the previous one is that the initiation is carried out not by internal management, but by external structures that carry out stock quotes on the stock exchange.

Capitalization- an economic term used in the following meanings:

1. An increase in the volume of the company’s own funds as a result of the transformation of dividends, surplus value, all or part of profit into additional production objects (equipment, means and objects of labor, personnel) or into additional capital. In this case, the essence of capitalization is to convert future income into capital. Capitalized funds replenish the fund of capitalist accumulation.

2. Analysis of the value of the company or its property, where the parameters for evaluation are:

Volume of working and fixed capital;

The market value of securities issued by the company (shares and bonds);

The amount of profit received each year.

In the banking sector, capitalization consists of issuing shares, increasing operating capital by adding interest rate of return and other operations to increase the capital base.

Depending on the activities carried out, a distinction is made between income capitalization (assessment of the value of companies) and market (stock) capitalization of the company (assessment of the value of securities).

If we consider the trends in business development in Russia, one of the most common is the “business capitalization” strategy, which in general can be called positive. What are the reasons why you decide to use this particular tool for the further development of the company, and the results of its use?

The volume of attracted investments directly depends on the value of the company. Investments, in turn, ensure the introduction of new technologies, improved quality of finished products and/or services, and a host of other positive factors. If we consider this trend from the point of view of macroeconomics, then the result of business development is an increase in gross domestic product.

But on the other hand, the tools that are used to increase business capitalization are short-term. Although initially they are strategic in nature. In practice, top management is tasked with increasing the capitalization of a business in a fairly short period of time. This is due to the fact that, unfortunately, company owners still cannot afford to plan the development of their business for the long term. There are several reasons, and many of them have more to do with politics, the level of corruption and crime. We will not consider them.

Reasons for making short-term decisions

But it is worth dwelling in more detail on the reasons for making short-term decisions in management.

1. Brapidly changing external environment. The market is developing rapidly, the growth of companies in many areas of activity is colossal. In this regard, additional difficulties arise in the use of long-term instruments. In current work, immediate problems arise that also require solutions. And behind this routine it is difficult to look into the future at least ten years in advance. Of course, in Russia there are enterprises that are engaged in strategic development. But these are either representatives of large Russian businesses, or Western companies working according to corporate standards. I also often see organizations that build a strategy for a five-year perspective.

2. Specifics of decision making. As a rule, even with a strategy, owners want to achieve quick results. Therefore, top management makes decisions in such a way that the company’s performance indicators are noticeable within a short interval of time. Thus, management itself is motivated to achieve short-term results.

3. Lack of continuity of policy and strategic vision in the company. In Russia, as well as in Western countries, it is the norm to change jobs frequently. And if an operational employee, when moving to another service for a certain period of time, creates a vacuum in his workplace, then what can we say about problems in the company when top management changes. When taking on a new position, the head of a department or company as a whole rebuilds the management system, and the organization is in a fever. The same thing happens when there is a change of ownership, only on a larger scale. In addition, without planning to stay in one place for a long time, employees strive to achieve short-term results. They are not interested in what will happen to the company after they leave. At the middle level of management, management is concerned with the implementation of the plan in a month, at a higher level - with the implementation of the plan in a year.

4. Business capitalization as an end in itself. The enterprise develops up to a certain point, and then the owner sells it. To make such a transaction with maximum benefit, you need to choose the most successful moment in the life cycle of the company/brand (Fig.). That is, initially the owner does not set himself the goal of creating a company that will be effective in twenty or thirty years.

Rice. 1. Company life cycle

On average, according to statistics in the USA and Europe, companies live for 40-50 years. In the Russian, more unstable market, it is too early to talk about statistics. However, it is obvious that even if we exclude fly-by-night companies, the picture that emerges is not so optimistic. Although 40-50 years for a company is not long. Organizations that are more than 100 years old can generally be counted on one hand. But they are the world leaders in their industry, they are the ones who think with a perspective of 10-25 years ahead.

Well, now I propose to move on to visual examples. Let's remember how the value of a company is assessed and thanks to what factors the “Business Capitalization” strategy is implemented. There are many methods (the most famous of them are EVA, MVA, SVA, CVA and CFROI), we will not consider them in detail.

In general, the value of a company can be written as:

Company value = invested capital + discounted EVA from existing projects + discounted EVA from future investments.

Economic Value Added (EVA)- the model for calculating economic added value is the most famous and widespread and is calculated based on the following formula:

EVA = NOPAT - WACC x CE,

where NOPAT (Net Operation Profit After Taxes) is net operating profit after taxes;

WACC (Weighted Average Cost of Capital) - weighted average cost of capital;

CE (Capital Employed) - the amount of capital invested. Let's take a closer look at the factors influencing the calculation.

NOPAT (Net Operating Profit After Tax) can be calculated as follows:

NOPAT = net profit before tax + interest payable + interest on lease payments + goodwill amortization (depreciation of intangible assets) - amount of taxes paid.

In the future, it may be necessary to detail the calculated indicators. WACC takes into account the shares and market value of capital, both equity and debt, risks associated with the use of capital, as well as risks inherent in the enterprise. Can be calculated:

WACC = cost of equity x share of equity + cost of debt x share of debt.

Cost of Capital can be calculated using the formula of the CAPM risk assessment model (capital assets pricing model):

CC = Rf + ?(Rm - Rf),

where Rf is the risk-free rate of return;

Market level of profitability;

A coefficient reflecting the correlation between an asset and the market (prices and indices).

From the above relationship it follows that an increase in EVA over the period under review can lead to a decrease in the value of the company for several reasons.

It would seem that the methodology itself takes into account all the most important characteristics, including the logistics component that is relevant to us. But….

An increase in the Economic Value Added (EVA) indicator in any period may be caused by factors that have negative consequences in the long term. And since investments in logistics are usually expensive, they fall precisely within this long-term perspective.

The impact of short-term decisions on company value

The main and most painful issue when making short-term decisions in order to increase the value of the company is cost reduction. What costs are cut first? As a rule, wages. The consequence is an outflow of highly qualified specialists, redistribution of responsibilities to fewer employees, fatigue and general dissatisfaction of the team, lack of internal motivation for effective work, a greater number of errors, as a result - increased costs in other areas. If we put this logical chain succinctly, it can be presented as follows: “In the long term, this approach can lead to an outflow of “talent”, which will weaken the competitive position and lead to a decrease in future EVA.”

Another point when assessing the value of a company is this is an investment. If we are talking about investments in warehouse and transport capacities, then they fall on capital costs, which also does not increase the value of the company.

If we are talking about investments in information support, then in the short term the picture looks like this: a software product is initially purchased not with the goal of increasing logistics efficiency, but with the goal of increasing the future value of the company.

The practice of making management decisions is permeated by the inertia of the accounting vision of the company's operations. The main difficulty lies in the very interpretation of costs and profits. From the accounting interpretation it follows that a positive result of a company’s activities is achieved when income covers actual expenses. But in conditions of increasing speed in business, such a coarsening of the vision of the result must be treated extremely carefully. In this case, the problems of investment risk are ignored. None of the indicators of accounting profit reflect the investment needs of the company and are far from the amount of funds available for withdrawal by the owner. However, without analyzing investments and planning them, it is impossible to complete the task of strategic management in general and, in particular, the development of effective logistics in the company. Here the approach is even simpler - justifying investments in logistics infrastructure is even more difficult.

Justification of investments in logistics areas

In order not to end on a sad note, let's look at the tools that will correct these imbalances. Especially if the very justification of investments in this or that area of ​​logistics depends on us. The main message of these tools is to demonstrate that the investment will provide cost changes over the long term and improve efficiency in various functional areas (from inventory turnover to goodwill depreciation).

Basic tools.

1. Use in practice systems control elements in such a separate block as cause-and-effect relationships. Example: investments are needed in the development of warehousing. When justifying the required amount, special attention should be paid to the existing costs of loading and unloading operations, existing losses and labor intensity of work, and even more attention should be paid to the level of service.

2. Application of functional cost analysis at least for local purposes ( activity-based costing). Since this approach allows you to take into account costs by process, it becomes possible to identify types of work that create and do not create added value (in the interpretation - value). Often it is enough to simply analyze processes to understand their inefficiency. If this is not enough to justify it, then you will have to demonstrate how much they cost the company.

3. Balanced Scorecard System ( Balanced Scorecard) allows, using the decomposition of indicators, to generate data that reflects not only the financial side of the activity, but also the qualitative one. Thus, thanks to the cause-and-effect relationship, the basis on which the achievement of strategic goals depends is revealed. But it is the achievement of the company’s strategic goals that lies at the heart of this tool.

4. Using elements "Best practice"(best practice). Carla O'Dell, Jack Grayson Jr., and Nimi Essaides have proposed a definition of best practice: “Best practices are those that have been remembered for outstanding results and that can be adapted to our situation.”

This tool is currently becoming more and more popular. Seeing a successful company (the best in its field), many try to reach its level, both by realizing tactical goals with the help of specific tools and by developing strategic thinking in general. This is especially true for logistics and marketing, since these areas are quite young in Russia.

Successes, especially of Russian companies, in these fields are very significant in justifying investments for top decision-makers. In this case, special attention should be paid to eastern companies. They are the leaders in increasing the value of the company by focusing on the long term.

Olga Gryaznova, trainer-consultant, Logist-ICS

Such a phenomenon as capitalization is an important characteristic of the stock market, which allows one to find out the general position of a particular state market or its industry. This article will consider capitalization as a phenomenon of the stock market, when used as an indicator that allows one to assess the financial and economic level of not only the state, but also its specific economic sector.

What is capitalization

A study of the economic situation in a particular region or state can be based on several indicators. This may include indicators of gross domestic product (GDP), the ratio of exported and imported goods, the exchange rate of the national currency, the total number of existing heavy and medium industry facilities, plants, factories, the volume of products produced and the development of the services provided. Another, perhaps even the most comprehensive indicator of economic development is the capitalization of the stock market. What is capitalization and how does this indicator affect the place of the state in the global economic community?

Definition

Capitalization is the totality of all securities available on the market under study. This includes both shares and bills, bonds and other securities sold through stock exchanges. The existence of a particular security cannot be separate from its issuer. That is, the person who issued this share. Therefore, stocks and bonds traded on the market can be grouped by their issuers. As a result, capitalization can often be the sum of the number of all capital changes in groups of issuers defined by belonging to a particular industry. This approach to research allows us to calculate not only the general development of the state market, but also its specific sectors. Be it heavy industry, the minerals industry, or computerized high technology structures.

Practice shows that when talking about the capitalization of a company, only the total total value of all joint stock companies is always meant. Or the total market value of the shares they placed. The level of capital of a joint-stock company is an indicator of its place and role in the stock market. The largest joint stock companies in terms of working capital are included in certain stock indices, which track the state and prospects of the stock market. In Russia, the data are MICEX and RTS (Moscow International Currency Exchange and Russian Trading System, respectively).

Types of capital

The structural capital of a particular joint stock company can have several forms of existence:

• Functioning. This is the capital involved in the activities of a given company. In total, it represents the amount of own and borrowed funds at the disposal of the company.
• Joint Stock. This is the capital of the company, the existence of which lies in the placement of the company's receipts on public stock exchanges. Represents the current market value of the company's placed receipts. This is one of the most common practices among large international concerns to increase their circulating money supply and obtain additional financial security. Entry to the stock exchange is carried out through an IPO - the process of the first placement of securities for access by anyone. Most often, during an IPO, securities have the lowest cost and are considered a very profitable purchase. Of course, if the company placing them represents a potentially profitable asset.
• Market value of the company. This is the value of a legal entity’s own and borrowed funds, considered in the form of the market value of shares and bonds placed by the company.

Since the market price of a share most often includes a larger nominal value, the share capital, or capitalization of a joint stock company, is greater than its authorized money supply.

The authorized capital creates new value, which is partially distributed among shareholders as dividends. And partly in the accounting department of a joint-stock company, where, along with the authorized money supply, it forms the ever-increasing equity capital of the company. The latter, as an increased value, creates much greater profits than before, which leads to the payment of higher dividends. And also again has a positive effect on the growth of the capital of a legal entity.

This scheme for moving money supplies contributes to the systematic growth of the company’s economic strength and at the same time is not a burden for its shareholders. Since the financial strength of the annual amounts paid - dividends - also grows. Due to the growth (actual or potential) of dividend income, the value of a piece of the corporation increases. And this only increases the market value of the enterprise, and, as a result, everything also has a positive effect on the growth of its capital structure.

Market price

At its core, the difference between stocks and bonds is that the market price of bonds (usually issued with a fixed interest rate) approaches their par value over time. That is, it does not, like a stock, have a tendency towards the prospect of unlimited growth. How can this happen to a company's shares that are skillfully managed? Consequently, based on this judgment, we can conclude that the capitalization of interest income on bonds does not lead to a noticeable distance between the size of working loan capital and its market valuation in securities.

The concept of a company’s “market price” follows from the processes available on the market for the purchase and sale of joint-stock companies in the form of various types of mergers and acquisitions. In this situation, the amount paid for ownership of the company always exceeds the available current value of its securities. This kind of market price of a company is based on its market value. That is, its capitalization as the sum of available equity and borrowed money.

Market price of the company

The market price of a company should objectively exceed its capitalization by approximately the amount of economically justified borrowed capital used by it. Because the market value of the shares compensates only for the available equity capital of the company, but not for that which was borrowed through a sum or a bank loan.

The process of buying a company is a process of repurchasing its capital, both its own in the form of shares and borrowed capital, primarily in the form of bonds available for this purpose. This is the underlying reason why, when purchasing a certain joint stock company as a whole, the everyday monetary value of its shares increases in comparison with its market level that existed before the moment when the impending resale process became known.

Analytical reports

As an indicator, the level of capitalization is reflected in annual reports. They are made up of both the part of the government responsible for the economic situation and independent research news agencies. These studies allow not only an examination of specific data, but also a comparative detailed analysis. The goal is to obtain a general idea of ​​the movement of an object along the coordinate system of economic stability. These indicators will be very interesting for investors. Especially those who are closely associated with investments in the main sectors of the Russian economy. Or those whose investments are focused on the above indices and the RTS.

Russian realities

At the end of last year, according to the results published, the capitalization of the Russian securities market amounted to 37.798 trillion rubles ($623.144 billion at the official exchange rate of the Central Bank of the Russian Federation).

Compared to the closing moment of the previous trading day, the capitalization of the Russian stock market decreased by 367.330 billion rubles, or by 0.96%. The leaders in total value are OAO NK Rosneft (4.173 trillion rubles), OAO Sberbank of Russia (3.697 trillion rubles), OAO Gazprom (3.627 trillion rubles). As of December 30, 2016, capitalization amounted to 37.823 trillion rubles, that is, since the beginning of the year the figure has decreased by 0.07%.

The presence of such corporations as Gazprom and Rosneft on this list indicates a high level of dependence of the Russian economy not only on the activities of these enterprises, but also on the entire oil, gas and mining industry as a whole. Against the backdrop of the loss of stability in the international mineral market, the Russian economy suffered a number of unpleasant blows in 2017, causing fluctuations in both the securities market and foreign exchange trading. Such entanglements have a great impact on the Russian ruble, and, consequently, on the general standard of living of the country's population.

At the end of the same 2016, world capitalization exceeded the mark of $65.6 trillion, which allows us to speak of more than double growth of the global economy over the past 12 years. The leaders of this list are the United States of America, Japan, the European Union, and China, which has shown incredible growth over the past 10 years. It is these powers that will control global economic flows in the near future. And the currencies they issue will become the main assets of currency trading structures around the world. The capitalization of the Russian stock market at the moment is seriously inferior to its foreign colleagues, not even entering the top ten largest powers in the world.

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