We all love a shortcut, don't we? Well, market capitalization can give you a quick view of what investors think about a given company.
A company's market cap represents the total value of its outstanding shares. You can calculate it easily, multiplying the current stock price by the number of shares outstanding. Nike
Now, by itself, that number doesn't tell you that much. You can classify it as a large-cap stock, but that's about it. And with the bear market knocking the market for a loop, lots of stocks have seen their market caps shrink. Las Vegas Sands
Perspective on a plate
Still, you can use market cap as a shortcut to make quick comparisons to other companies -- especially competitors in the same industry. Consider:
|
Company |
Market cap |
|---|---|
|
McDonald's |
$59.4 billion |
|
Burger King Holdings |
$2.4 billion |
|
Wendy's/Arby's Group |
$2.1 billion |
Did you realize that McDonald's has a market cap that's more than 20 times bigger than some of its rivals? Just driving down the street, you might see the same number of restaurants, but McDonald's has much higher revenues and profits, thanks largely to net margins of almost 20%.
But you shouldn't automatically conclude from this that Burger King and Wendy's are less worthy of investment -- they may be better poised to grow than their bigger competitor. But the market cap difference makes you look harder at all three to pick out similarities and differences in how they're doing.
Comparing companies to others of similar size in other industries can also be interesting. GM, for example, has just a tenth of the market cap of auto parts seller AutoZone
More seriously, though, when big companies become small, it's usually due to trouble. But when they're on their way up, small companies often hold a lot of potential.
Look at market cap to see how much investors think a given stock is worth, and use it as a springboard for further research.
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