Equity Market Capitalization

An individual company's market capitalization ("market cap" to its homies) represents the total value of the company's outstanding stock. Look at the stock price at any given moment if that company is publicly traded. Multiply that per share price by the number of shares outstanding.

That figure represents the market cap. Like, if a company has 300 million shares outstanding and its stock price is trading at $40 a share, then the market capitalization of the company is $12 billion. But this figure can be misleading. Specifically, the equity capitalization fo a company refers to the value that investors are paying for its future earnings or value creation.

So if a company has, say, $10 billion in cash and no debt on its books, then the Street, in paying $40 a share, is only giving it credit for its operations being worth just $2 billion. That is, the net equity value in the company is way less than the market capitalization would have you believe.

Okay, so...some math.

Hair Extensions for Dogs, Inc. has 20 million shares outstanding and trades publicly for $30 a share. The stock market is paying 30 bucks a share for the company, so it is the market that is setting a price on the whole company.

That is, for 30 bucks, you get 1 20-millionth of a company, with $30 million in earnings, no debt and $200 million in cash. All of it together comprises the total value of the company. So that's the market capitalization.

Equity capitalization looks at cash and debt and sometimes other easily sellable assets. But to keep things simple, just imagine that Hair Extensions for Dogs, Inc has a 600 million dollar market cap, no debt, and $200 million in cash sitting in its Wells Fargo account.

The market cap is $600 million but the equity cap is $400 million.

Why? Well, if the company wanted, it could dividend out the $200 million of cash that it has, or use it to buy back its own stock, or whatever else it wants. Maybe throw a huge party? Maybe not.

So the equity cap is $400 million. And this is an important number, because with the company earning $30 million this year and, say, $40 million next year, on that $600 million number it trades at 20 times this year's earnings, and 15 times next years.

But that’s its market cap. It's about where the overall stock market is trading, give or take. But if you back out the cash, the equity, or earnings power of the company, at just 400 million, is trading at 13x this year's earnings, and just 10 times next year's earnings. Cheap. Really cheap relative to its growth rate. So maybe this company is a screaming buy, and investors should pay attention.