ShmoopTube

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finance a la shmoop. what is market capitalization versus equity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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]

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

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

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

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

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

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

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

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

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

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

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

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

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from it's operations ,not about its balance

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

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

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