Market capitalisation (market cap) is the total market value of a company's outstanding shares of stock, calculated by multiplying the current share price by the number of shares outstanding. It represents the equity value the market assigns to the company and is used to categorise companies by size.
In Depth
Market capitalisation is the simplest measure of a company's size and equity value. It reflects the collective judgement of all market participants about what the company's equity is worth based on its earnings potential, growth prospects, and risk profile.
The formula is: Market Cap = Current Share Price x Total Shares Outstanding. A company with 50M shares trading at £4.00 has a market cap of £200M.
In the UK, companies are typically categorised by market cap: FTSE 100 (large-cap, typically £3B+), FTSE 250 (mid-cap, typically £500M-£3B), and AIM/smaller companies (small-cap, below £500M). These classifications affect index inclusion, analyst coverage, and institutional investment eligibility.
FP&A teams in listed companies should understand the relationship between their financial forecasts and market cap. If the FP&A team's internal forecast differs materially from market consensus expectations, this creates either a risk (if the company will underperform expectations) or an opportunity (if it will outperform). Managing this information gap is a core responsibility of investor relations, informed by FP&A analysis.
Market cap fluctuates daily with share price movements. A company might report strong results but see its market cap decline if results miss consensus expectations. This disconnect between absolute performance and market reaction is important for FP&A teams supporting investor communications.
Real-World Example
A UK technology company IPOs on AIM with 40M shares at 250p, giving an initial market cap of £100M. After two years of strong growth, the share price reaches 620p and the company issues 5M additional shares in a placing. Market cap is now 45M x 620p = £279M. The FP&A team notes that the 179% increase in market cap versus 120% increase in revenue reflects multiple expansion from 4x to 5.5x EV/Revenue.
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