In financial news, the term “capitalization” is often used. It can also be seen in a newspaper or magazine article, heard on radio and television programs, or simply on the street. What does this term mean?
Capitalization is a term that has several meanings, including:
- the process of converting part of the profit or all profit as a whole into additional capital, i.e. additional factors of production (objects of labor, means of labor, labor, etc.);
- the process of assessing the value of a company, carried out on the basis of its capital, both fixed and circulating;
- the process of assessing the value of a firm, which is based on the market price of its shares and bonds;
- the process of determining the value of the company, carried out on the basis of the received annual profit.
- the process of adding the rate of return of interest to the amount of active capital, as well as the method of issuing shares and other ways to increase their capital base.
The measure of the size of the market capitalization and its growth is often a characteristic of the success of a joint-stock company.
Capitalization is sometimes used synonymously with market capitalization, but in some cases it is the sum of long-term debt and market capitalization.
Capitalization can be sufficient, insufficient or excessive, it depends on the balance of the ratio between the economic capital of the company and the actual capital of the company at a given point in time.
Overcapitalization is characterized by inefficient use of cash resources: the company's free cash is not invested, but capitalized.
Undercapitalization occurs in situations where the company's activities are financed with borrowed funds or there is a desire to reduce the taxable base through an artificial increase in debt service costs.
The main capitalization methods are: split rate capitalization, direct capitalization, income capitalization, and straight-line capitalization.
Split rate capitalization: Two different discount or interest rates are used to estimate the projected cash flows for the same property.
Direct total capitalization is based on dividing net income by a coefficient, which is obtained by analyzing comparable properties and comparing income from these properties with selling prices.
Capitalization of income - calculation of the present value of the net profit that is expected to be received in the future.
Straight-line capitalization is the calculation of the capitalization ratio for real estate, which consists in adding the number of straight-line capital return to the percentage rate.
