Market Capitalisation – Calculation, Benefits, Limitations

Market capitalisation is a common term in the stock market used by everyone, from investors and traders to market analysts and company management. It is the market value of a company’s outstanding shares available in the market. The number allows investors to easily calculate the size and worth of a company in which they are going to invest.

Knowing the market cap of a company can help you measure risks and understand whether its stock can provide you with more returns. Read this blog to get detailed information about market cap, its calculation, and its benefits. With a better understanding, you will learn how to value a company in the market.

Market Capitalisation Definition

Market capitalisation, or market cap, is the total value of a company’s stock. It is measured by multiplying the total number of a company’s shares by its current market price. Outstanding shares are the number of shares that a company has issued for investors to buy. It gives investors a clear picture of the company’s size.

Understanding the definition of market capitalization enables investors to compare and evaluate the stocks of different companies before making a purchase.. However, a market cap can continuously change because it fluctuates based on a company’s current share price.

What are the Different Types of Companies Based on Market Capitalisation?

Based on the calculation of market capitalisation, the size of a company can be classified into three types in the stock market. Below are the three different types of companies: 

• Large-Cap Company: 

Large-cap companies are among the most stable in the market, which makes it the least risky option for investors to choose. The market cap of large-cap companies ranges from ₹7,000 crore to ₹20,000 crore. These companies are listed on the Nifty 50 or BSE Sensex. While the risk is low, the returns are lower than mid-cap and small-cap stocks. 

There is a low chance of price fluctuations of these stocks as they have reached the peak of their growth. Investors looking for a conservative investment option can buy the shares of these companies.

• Mid-Cap Company: 

Mid-cap companies have a market cap ranging from ₹5,000 crore up to ₹7,000 crore. Stocks of these mid-cap companies offer a balance between risk and return to the investors. Mid-cap companies have higher growth potential than the largest companies as they are yet to reach their peak.

Mid-cap stocks can be both risky and profitable as they are not fully established in their industries. The potential of getting returns from these stocks is higher than large-cap stocks but lower than the small-cap ones. Investors seeking a balance between risks and returns can invest in these companies’ stocks.

• Small-Cap Company: 

Small-cap companies have the smallest market capitalisation among these three categories of companies. The market cap of these companies can be up to ₹5,000 crore. Although the prices of these shares can be the most volatile, they can offer the chance to make the highest returns among the three types of companies based on market cap.

Small-cap stocks carry higher risk and return potential compared to large-cap and mid-cap stocks since they are still in the growth stage. A large number of listed companies belong to the small-cap category.

How Can One Calculate Market Capitalisation?

Calculating market capitalisation allows you to find the best stock to invest in as per your requirements. The market capitalisation formula is simple to understand and is presented below:

Market Capitalisation = Current stock price x Total outstanding shares

You can easily get a company’s market cap with this easy multiplication formula. Let us take an example. Consider that Company ABC has 10 crore outstanding shares with a price of ₹100 each. According to the formula, the market cap would be:

₹100 per share × 10,00,00,000 shares = ₹10,00,00,00,000 or ₹1,000 crore.

You must remember that a company with a higher market capitalisation has either a high share price and moderate outstanding shares or a large number of outstanding shares with a moderate share price. A combination of both factors can be the reason why a company has a higher market cap.

Benefits of Using Market Capitalisation

Understanding the market capitalisation meaning makes you aware of the market position of a company and helps you analyse its financial health against its industry peers. Here are some of the common benefits of using market capitalisation to assess companies and their stocks:

• Stock Suggestions: You can choose a company stock based on its market capitalisation. The classification of the market cap can help you to choose the options according to your requirements.

• Risk Assessment: A company’s market cap also indicates the risk levels of investing in it. Stocks with larger market caps typically have less volatile price action and high liquidity. Similarly, small-cap stocks are generally more volatile in prices and less liquid.

• Comparative Analysis: Using the market cap also allows you to compare and contrast different companies within a sector before investing. You can analyse the strengths and weaknesses of a particular company compared to its industry peers. You may also access the broader market trends by comparing the market cap among indices.

• Balanced Portfolio: You may also diversify your investment portfolio with the help of a market cap. Analysing the market cap of different companies helps you build a balanced portfolio by choosing a mix of large-cap, mid-cap, and small-cap stocks.

What are the Factors That Affect Market Capitalisation?

The market capitalisation of a company can be affected by numerous factors, which may also impact the investment portfolio of investors. Below are the factors that may affect the market capitalisation of companies:

• • Demand for Product or Service: The demand for a company’s products or services and the company’s ability to fulfil these demands can affect the market capitalisation of a company. Companies with high revenue growth and large profit margins usually have higher market caps.

• Market Fluctuations: Market fluctuations can significantly impact a company’s market cap. Downturns in an industry or a specific company, as well as fluctuations in a company’s share price, can affect its market cap. An increase in share price can raise the market capitalisation, and a reduction in share price can decrease the market cap.

• Stock Buybacks: A company’s market cap decreases if it repurchases its own shares and decreases the number of outstanding shares from the market.

• Performance and Reputation: A company’s market cap can go down when there is a significant downfall in its performance. Additionally, factors like negative customer reviews, scandals, poor reliability of products, and negative social media attention can also reduce a company’s market cap.

Limitations of using Market Capitalisation

Although the market cap metric has numerous benefits, it also has some limitations. Below are some common limitations of using the market cap to assess companies:

• You will not be aware of a company’s financial health or debt levels while evaluating only its market cap.
• Market cap is influenced by short-term fluctuations in the market. Therefore, two companies with the same market cap may have different financial positions.
• Share buybacks and stock splits can change a company’s market cap.
• Small-cap companies with a lower market cap can have significant growth potential, but they are often overlooked by larger and established ventures.

What are the Other Ways to Evaluate a Company’s Value?

Market capitalisation is a crucial metric for understanding the value of a company. However, you can use other ways to evaluate a company. You can use these options for evaluating the company’s value:

• • Equity Value: Understanding equity value can help you to evaluate a company’s value. You can calculate the equity value of a company by checking its core business operations, assets, liabilities and cash reserves. 
  • Relative Valuation: Analysing valuation metrics like the price-to-earnings (P/E) ratio and price-to-book (P/B) ratio can be a good option to find the value of a company. For instance, a company with a lower P/E ratio can be considered undervalued, which indicates an investment opportunity.

• Fundamental Analysis: You may also analyse a company’s financial statements, including its balance sheets, income statements, and cash flows. You can get a deeper understanding of the company’s value and performance by analysing the fundamentals.

List of Top Indian Companies According to Market Cap

The market cap of companies can be determined by multiplying the share price of each company by their total number of shares. The table below shows the top 10 Indian companies based on their market cap, with the updated share price and revenue of Q3 FY2025:

Essential Valuation Ratios

You need to understand a few more valuation ratios besides knowing the market capitalisation formula. Here are some of the essential valuation ratios that you should keep in mind:

• • Price-to-Free-Cash-Flow Ratio: You may use this valuation ratio to know about the estimated ROI. You need to divide a company’s market cap by its free cash flow of 12 months.
  • P/E Ratio: You can use the P/E ratio to estimate your potential return on investment (ROI) relative to the stock price. You have to divide the market capitalisation of a company by its net income of the last 12 months to get the ROI.

• P/B Ratio: The P/B ratio is an important metric that helps to compare a company’s book value with its market cap. You can do this by subtracting the liabilities from the total assets.

• Enterprise-Value-to-EBITDA: The Enterprise-Value-to-EBITDA is used to calculate short-term operational returns. You can calculate this ratio by dividing the enterprise value by the EBITDA.

You can get the enterprise value by adding a company’s market cap with the value of debentures, preference shares, and debentures and deducting the total cash. In addition, the EBITDA is the earnings of a company before interest, taxes, depreciation, and amortisation.

Final Thoughts

Before choosing any particular stock, understanding the market capitalisation meaning is crucial. This can help conduct risk assessments and comparative analyses of stocks. Using a market cap also allows you to choose between large-cap, mid-cap, and small-cap companies’ stocks according to your needs.

Want to start your investment journey? Download the Torus Digital app to analyse the market capitalisation of different companies. Its advanced platform allows you to easily find the best stock for your investment needs.

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