Market capitalization and revenue are two different ways of measuring the value of a company, but they are not directly related. Market capitalization is based on the stock price and the number of shares outstanding, while revenue is the amount of money a company earns from sales. Let me explain more in detail.
- Market capitalization: This is the total value of a company’s outstanding shares in the stock market. It is calculated by multiplying the number of shares outstanding with the share price. For example, if Company A was trading at $40 per share and had a million shares outstanding, the market capitalization would be $40 million ($40 x 1 million shares)¹. Market capitalization reflects the market’s perception of a company’s value, which may depend on factors such as reputation, growth potential, profitability, and risk. However, market capitalization does not take into account the debt or assets of a company, which may also affect its value.
- Revenue: This is the amount of money a company receives from selling its products or services. It is also called sales or income. Revenue is the top line of an income statement, which shows how much money a company makes before deducting any expenses or taxes. For example, if Company B sold 100,000 units of its product at $10 each, the revenue would be $1 million (100,000 x $10)¹. Revenue reflects the actual performance of a company’s operations, but it does not indicate how profitable or efficient a company is.
Therefore, market capitalization and revenue are different indicators of a company’s value, and they may not always be proportional. For example, a company may have a high market cap but low revenues if the market expects it to grow rapidly in the future or if it has a strong brand name. On the other hand, a company may have low market cap but high revenues if it operates in a competitive or declining industry or if it has low profit margins.