What is Capitalization?
In the business world, capitalization has two meanings. The first meaning, also calledcapitalization, refers to the value of a company's . The formula for capitalization is:
The second meaning of the term relates to the act of asset instead of an expense.
How Does Capitalization Work?
Let's assume Company XYZ has 10 millionand the current share price is $9. Based on this information and the formula above, we can calculate that Company XYZ's capitalization is 10 million x $9 = $90 million.
In the second use of the term, let’s assume Company XYZ creates a new drainage system to prevent run-off rainwater from flooding the neighbor’s business. Because the costs associated with the change constitute an addition to the property and allows it to use the property as a concert venue, Company XYZ can balance sheet, which would lower the company’s net income, Company XYZ records the costs as an on the balance sheet. These assets then depreciate, which has a much smaller effect on net profits.those costs. So, instead of recording the costs as an expense on the
Why Does Capitalization Matter?
Capitalization reflects the theoretical value of a company, but this is usually not what the company could be purchased for in a normaltransaction. One reason for this is that the value of material nonpublic information, management changes, operating synergies between the and the company, and other intangible factors may not be reflected in the price or the .
In thesense, capitalization is good for companies that want to keep as high as possible; however, it’s not as good for companies that want to pay as little in as possible (business expenses are tax-deductible; capitalized assets are not).