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Find out the meaning behind "fi, fie, fo, fum."

Language:
English Language

Transcript

00:00

finance a la shmoop. what is market capitalization versus equity

00:07

capitalization? alright let's start with the math. hair extensions for dogs Inc

00:12

has 20 million shares outstanding in trades publicly at 30 bucks a share. [store front shown]

00:17

the stock market is paying that 30 bucks a share for the company so it is the

00:22

market the stock market that is setting the price on the whole company. that is

00:27

for 30 bucks you get 120 millionth of a company, that has 30 million dollars in

00:33

earnings no debt and 200 million dollars in cash. well all of it together

00:37

comprises the total value of the company so that's the market capitalization. got

00:43

it? shares outstanding time stock price. equity capitalization looks at cash and [equation]

00:47

debt and sometimes other easily sellable assets. it has on the balance sheet but

00:52

keep things simple here just imagine that hair extensions for dogs Inc has a

00:56

six hundred million dollar market cap, right 20 million times 30 bucks ,no debt

01:00

and it has 200 million dollars of cash sitting in its Wells Fargo account. well

01:04

the market cap is 600 million but the equity cap is 400 million. why? well if

01:11

the company wanted it could dividend out the 200 million dollars have cashed at

01:16

it had tomorrow, or use it to buy back its own stock. or well whatever else it [dogs sit at table with bags of cash]

01:20

wants maybe throw a huge party so the equity cap is 400 million dollars and

01:25

this is an important number, because with a company earning 30 million this year

01:29

and say 40 million next year. on that 600 million number well it trades it 20

01:34

times this year's earnings and 15 times next year's but that's its market cap.

01:39

its trading about where the overall stock market is trading give or take. not

01:43

that cheap not that expensive kind of ho-hum .but if you back out the cash the [newspaper article shown]

01:48

equity or earnings power of the company at just four hundred million dollars is

01:53

trading at only 13 times this year's earnings in just ten times next year's

01:57

earnings. cheap really cheap relative to its growth rate .so maybe this company is

02:02

as screaming buy an investor should really pay attention in the stocks cheap

02:06

here buy buy buy. well the key takeaway is that the equity

02:09

of a company in this sense is all about the earnings power that the company gets

02:12

from it's operations ,not about its balance

02:16

sheet. so as long as those poodle hair extensions keep flying off the shelves [dogs with long hair]

02:20

while things will be gravy as far as you're concerned.

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