Market Cap

What is Market Cap?

Market Cap, also known as Market Capitalization, is a financial metric that represents the total value of a company in the stock market. It is calculated by multiplying the current share price by the total number of shares in circulation.

What Does Market Cap Represent?

Market Cap represents the market assessment of a company, which is how much the market is willing to pay for all of its outstanding shares. This metric reflects investors' perception of the company's value and is influenced by various factors, such as financial performance, growth prospects, sector competition, and economic conditions.

How Is Market Cap Calculated?

Calculating Market Cap is simple. Just multiply the current share price by the total number of shares in circulation:

So, if 'SGAZ3' is trading at $6.00 and has 100,000 shares in circulation, we can consider its market cap to be ' $6.00 * 100,000 = $600,000'.

Importance of Market Cap

Market Cap is a fundamental metric for investors and financial analysts. It helps determine a company's relative size in the market and serves as the basis for various financial indicators. Taking the main index of the Brazilian stock market, 'IBOV', as an example, we can see that its value is calculated based on the performance of the companies included in it, and the higher the market cap of a company, the more it affects the index.

Moreover, it is used to compare companies within the same sector, assess a company's growth potential, and identify investment opportunities. It is also one of the key pieces of information used for selecting assets in investment strategies like 'value investing,' which seeks undervalued companies in the market.

Another scenario where market cap is used is in the acquisition of a company or part of it, where market cap can be used for an initial offer that will be negotiated between the parties.

Problems with Using Market Cap

Since this metric is calculated based on the share price, it doesn't reflect the company's quality in the short term. As share prices tend to follow earnings in the long run, we can say that the best and most profitable companies will experience greater appreciation.

It's also essential to remember that, for the same reason, it doesn't consider other company assets or liabilities, such as properties, debts, and cash flow. Therefore, it's crucial to analyze other metrics and company information before making investment decisions.

In essence, we can think of it this way: You have a very old, rare, and well-preserved car that you know is worth $100,000, and every day someone knocks on your door with an offer to buy it. Depending on the person's mood (and their knowledge of vintage cars), they might offer the full $100,000, and you can choose not to sell it because you believe it will appreciate further. Some days, this person is in a bad mood and offers $20,000 for the same car.

By knowing the real value of that asset (uniqueness, preservation, appreciation potential), you protect yourself from "selling out of desperation." In the stock market, this "real value" is obtained through analysis and studies (like the Graham Fair Value), and the value the person is offering today is the Market Cap.

Example

ALPA4:

Alpargatas is a global company, the owner of Havaianas, ioasys, and 49% of Rothy's.

In July 2023, it was trading at around $8.60. Given that it had a total of 683,062,222 shares (considering shares in free circulation, treasury shares, held by controllers, etc.), we can calculate its market cap as follows:

In other words, the company was trading on the market with a market cap of $5.8 billion.

Example

TSLA:

Tesla Inc. is a well-known electric vehicle and clean energy company.

Its stock price in the 3Q2023 financial report was around $250.00, and it had a total of 3.15B outstanding shares. In that case, we can calculate the market cap as follows:

In other words, the company was being traded on the market with a capitalization of $787.5 billion.