What is Capitalization?
In the business world, capitalization has two meanings. The first meaning, also called
Capitalization = Current Price x Shares Outstanding
It is important to that is not the same as value, nor is it equal to a company's debt plus its shareholders' equity (although that too is sometimes referred to as simply the company's capitalization).
The second meaning of the term relates to the act of for a cost as an asset instead of an expense.
How Does Capitalization Work?
Let's assume Company XYZ has 10 million
Companies with less than $1 billion of are generally regarded as "small cap" companies. "Large cap" companies usually have at least $8 billion of market cap.
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 those costs. So, instead of recording the costs as an expense on the 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.
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 normal factors may not be reflected in the price or the .
In the sense, 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).