Both Market Cap and Business Valuation represent the worth of the company in some form. Though the terms sound similar, the methods of use of the two terms are different.
In the 21st century, with the business sector becoming competitive, It is important to assess the value of our business accurately.
There are numerous ways to assess the company's value and size, each differs in its precision and calculation.
What is Business Valuation compared to Market Cap?
With the help of Business Valuation, we can determine the market / economic value of the business.
One can measure it using appropriate methods by including all the necessary aspects of the business.
We need business valuations for various purposes like partnership disputes, sale value, bankruptcy proceedings, etc.
How does Business Valuation works?
Business Valuation includes the analysis of the company's capital structure, the market value of its assets, and future earnings prospects of the company, etc.
We can determine business valuation using various approaches like asset-based approach, similar company comparisons, and financial statements review.
While there are many approaches, one can choose the appropriate approach depending on the purpose of business valuation.
Basic Methods of Business Valuation
The three common methods used to evaluate one's business are
- Market Capitalization
Market cap is the simplest and reliable method of all and Its calculation is based on issued shares and share value.
- Comparing Companies
This valuation process is perfect for private companies. Its calculation is done by first estimating the historical sale prices of comparable businesses and then finding the average sale price.
- Multipliers
Multipliers are the best business valuation for small-scale companies. While the estimate done by this method is rough, it often remains as a preliminary valuation method.
Its calculation is done by multiplying the gross sales, gross sales inventory, or net profit by an appropriate coefficient.
What is the Meaning of the Word 'Market Cap' compared to Business Valuation?
Not only Market Capitalization is often called 'Market Cap', But it is also one of the simple methods for evaluating a business's value.
We can calculate it by multiplying outstanding shares with the current market price of each share.
"Market Capitalization is the simplest method of Business Valuation"
While Market Value determines the overall value or worth of the company, Market Cap only assesses the market value of the company's equity i.e shares.
How to Calculate Market Cap?
Market Cap = Outstanding Shares * Market Price of share
For example, Take a company 'X' that has issued 250 shares each worth 200 bucks in the market. This 200 is the Market value, i.e the price which an investor will need to spend to buy 1 share.
Total market capitalization of this company= 250*200= 50,000
Are Market Cap and Business Valuation the same?
While Business Valuation is an overall method of evaluating the worth of a company using various methods and approaches, Market Cap is one specific way of determining the company's worth.
One can avail of business valuation services for various purposes. But, when we need to analyze the potential trade opportunities of a business, we should opt for Market Cap.
Conclusion
Assessing the business valuation of your company is important when it comes to selling your business or other similar purposes.
While Business Valuation is a process of determining the total worth of the business, Market Cap is one specific method of determining the business valuation.
