It’s the perennial question among investors.
What is capitalization?
Capitalization has multiple meanings. In accounting, capitalization refers to the process of expensing the costs of attaining an asset over the life of the asset, rather than the period the expense was incurred. Rather than listing the asset as an expense, the asset is added to the company’s balance sheet and depreciated over its useful life.
In finance, capitalization refers to the sum of a corporation’s stock, long-term debt and retained earnings. Retained earnings are the percentage of net earnings retained by the company to be reinvested in its core business or to pay off debt.
The finance field also uses the term capitalization to refer to the number of a corporation’s outstanding stocks multiplied by the stock’s share price. This is also called the market capitalization.
In accounting, most revenue and expenses are recorded during the time they are incurred. However, the company may benefit by expensing certain assets over more than one accounting period. This typically takes place with large assets that may be expenses over a 20- to 30-year period.
Book value is another term for capitalization within the finance field. When investors talk about a company’s book value, they’re referring to the sum of the company’s stock, long-term debt, and retained earnings.
To determine a company’s market capitalization, multiply the company’s outstanding stocks by its share price. Companies with a market capitalization between $300 million and $2 billion are classified as small-cap companies.
Those with a market capitalization between $2 billion and $10 billion are considered mid-cap companies, and those above $10 billion are considered large-cap companies.
XYZ Construction Co. purchases a new dump truck for $70,000. The truck is expected to last 20 years. The company also paid $2,000 to have the truck delivered to its location. Rather than listing the $72,000 as an expense, the company will capitalize the entire amount and expense the cost over the next 20 years.
The Ajax Corp. has $5 million in long-term debt and $10 million in equity. Therefore, its capitalization is $15 million.
The ABC Co. has 10 million outstanding shares of stock, and the stock is currently selling for $20 per share. Therefore, its market capitalization is $200 million.