What is the capitalization rate? Definition, calculation methods. What is a company's market capitalization
Let's consider capitalization rate. It is included in the group of indicators of the financial stability of an enterprise and characterizes long-term solvency. The capitalization ratio is classified as a group of financial leverage ratios; this group includes indicators characterizing the ratio of equity and borrowed funds. In Western sources, the capitalization ratio is referred to as Capitalization Ratio.
I will consider the capitalization ratio according to our usual analysis scheme. First, we will reveal the economic essence of the coefficient, then we will present the calculation formula, calculate the coefficient for a domestic company and, in conclusion, recall the optimal values of the indicator.
Capitalization rate. Economic essence
As mentioned above, capitalization ratio refers to financial leverage ratios, and they determine the efficiency of use of borrowed capital by an enterprise. It shows how our enterprise depends on borrowed funds.
How is the capitalization ratio read?
If the value of the capitalization ratio decreases, this indicates that:
- The company retains more net profit.
- The company finances its activities with its own funds.
- Investment attractiveness increases.
If the value of the capitalization ratio increases, then this tells us that:
- Risk increases entrepreneurial activity.
- The enterprise increases the share of borrowed funds involved in financing its activities.
- Investment attractiveness is decreasing.
Who uses the capitalization rate?
This coefficient is extremely important for investors who analyze it to evaluate investments in a particular company. A company with a large capitalization ratio will be more preferable for investment. This is explained by the fact that it will have more equity in its capital structure. However, too great importance the coefficient is not very good for the investor, since the profitability of the enterprise and thereby the income of the investor decreases.
Also this coefficient used creditors. The situation with them is exactly the opposite for investors. The lower the capitalization ratio, the more preferable it is to provide a loan.
What are the synonyms for capitalization ratio?
Capitalization ratio has the following synonyms:
- Financial leverage ratio,
- Financial risk coefficient,
- Attraction rate,
- Leverage of financial leverage,
- Debt to equity ratio,
- Self-financing ratio.
In fact, all the names listed above are one capitalization ratio, but often in different literature it is called differently. Therefore, it is useful to know its similar names.
Capitalization rate. Calculation formula
Capitalization rate formula has the following form:
Capitalization ratio = Liabilities/Equity =
(Long-term liabilities + Current liabilities)/Equity=
(p.1400+p.1500)/p.1300
All data for calculation can be taken from the “Balance” form. It is important to note that under “Liabilities” in the formula, various authors use either the sum of short-term and long-term liabilities or only long-term liabilities. Thus, the following formula also holds:
Capitalization ratio = Long-term liabilities/Equity = line 1400/line 1300
Until 2011, the formula for calculating the capitalization ratio was as follows:
Capitalization ratio = (line 590+line 690)/line 490
In foreign literature one can find the following formula coefficient calculation:
Capitalization rate. Calculation using the example of OJSC MMK
Capitalization ratio for OJSC MMK
For calculations, we will need public accounting reports, which can be obtained from the SPARK or InvestFunds service. Our example took four quarters of 2013 and the first three quarters of 2014.
As you can see, we only work with lines from the “Passive” section. Capitalization ratio for OJSC MMK:
Capitalization ratio 2013-4 = (50199274+78705285)/138414101 = 0.9
Capitalization ratio 2014-1 = (48096120+90037849)/137873396 = 1
Capitalization ratio 2014-2 = (45956368+87681300)/147094603 = 0.9
Capitalization rate 2014-3 = (37257076+100154968)/150436511 = 0,91
As you can see, during the year of calculations the coefficient almost did not change and was at the level of 1. This is a standard value for domestic enterprises. We can conclude that OJSC MMK has a share of borrowed funds equal to the share of its own funds (50/50%). Below we will talk in more detail about standard values.
Capitalization rate. Normative value
Let's talk about standard values. In the domestic literature, the capitalization ratio is considered optimal for an enterprise when value 1. In other words, the company has equal shares of borrowed and equity capital (50% borrowed capital, 50% equity).
Economically developed countries the coefficient value is 1.5 (60% borrowed capital, 40% equity)
The standard for the coefficient depends on the industry of the enterprise, the size of the enterprise, capital intensity of production, period of existence, profitability of production, etc. Therefore, the ratio should be compared with similar enterprises in the industry. This will provide a clearer picture of the finances of the enterprise.
Summary
So, we have looked at one of the most important ratios for investors and lenders - the capitalization ratio. The higher its value for an enterprise, the more preferable it is for investors and less for creditors. A high value of the ratio indicates that the company is losing financial stability; too low a value - the company loses profitability. The capitalization indicator must be used in conjunction with the profitability and liquidity ratios of the enterprise. Read more about the main profitability indicator in the article: ““.
Thank you for your attention!
Capitalization rates - a group of parameters that characterize the activity of an enterprise and the ability to properly use what is available. Such parameters may include the following coefficients - financial stability, financial autonomy, financial risk, maneuverability of equity capital.
Capitalization rate– a parameter representing the ratio of a company’s borrowed capital to its total capitalization. The purpose of the capitalization ratio is to display how well the personal income is used. International name capitalization ratios – “Capitalization ratios”.
Capitalization rate– an indicator that is calculated by financial analysts to assess the investment attractiveness of an enterprise. The calculation is made by dividing the total liabilities of the enterprise by its total capitalization. The lower the result, the higher the level of sustainability of the organization. IN in this case is the total value of the company, formed from two indicators - the direct market price of assets and other intangible resources.
Capitalization rate (for real estate)– a parameter that shows the correlation between the market price of a property and the total amount of profit generated during the operation of the building (for example, renting out premises).
The essence and features of capitalization ratios
By their structure, capitalization ratios are included in the main group that characterizes the stability of the company as a whole and its solvency in the long term. As a rule, capitalization ratios are in the same group with other important parameters, for example, financial leverage ratios. This also includes parameters characterizing the ratio of the company's own and borrowed funds.
In its essence, the capitalization ratio helps determine how well the company's management manages capital efficiently and effectively. Also, by this parameter one can judge the organization’s dependence on borrowed capital. In essence, the capitalization ratio is a parameter that characterizes the sustainability of an enterprise in current market conditions.
The numerical value of the coefficient is analyzed as follows :
1. If the capitalization rate falls over time, then the following conclusions can be drawn:
Management managed to earn more net income over time;
- the company manages to finance current activities from personal funds;
- the investment attractiveness of the object increases.
2. If the capitalization rate increases over time, then this means the following:
The company became more dependent on borrowed funds during its operations;
- the risk of business activity has increased. At any time, the company may fail to pay off short-term obligations and declare itself bankrupt;
- investment attractiveness decreases. The likelihood of attracting credit funds for this is close to zero.
Capitalization ratio is a real helper for several market participants
:
- investors who plan to invest their funds in a particular enterprise. The higher the capitalization parameter a company has, the more prospects for a potential investor, and the higher the likelihood that he will invest his funds in. On the other hand, too high a ratio is also bad, because the profitability of the company decreases, and as a result, the number of investors decreases;
- creditors. Here the situation is the opposite. The lower the capitalization ratio, the greater the stability of the company and the safer it is to lend to such an organization. In their practice, when issuing a commercial loan, most banks evaluate this ratio. Its parameter is one of the criteria in making a decision on issuing a loan;
Financial analysts of the company. An analysis of the capitalization ratio is also carried out by company employees in order to determine the real dependence of the enterprise on borrowed funds and to develop a mechanism for further increasing this parameter.
Capitalization ratio has many synonyms that are found in modern financial literature. This parameter is called the coefficients of financial leverage, financial risk, attraction, self-financing, ratio of borrowed and personal funds, and so on.
Another important point– standard capitalization ratio. In most books on economics and finance, the recommended value for this parameter is one. That is, the company must equally have both its own and (50 to 50 ratio).
In practice, in economically developed countries the capitalization ratio is higher and is about 1.5. This means that in the enterprise 60% are borrowed funds, and 40% are borrowed funds.
At the same time, the standard financial risk coefficient largely depends on a number of factors - the company’s field of activity, production profitability, period of existence, industry, size of the organization and its capital intensity, period of operation on the market, and so on. Therefore, when analyzing calculated coefficient capitalization is always compared with an enterprise in a similar industry. In this case, the analysis will be as complete as possible.
Calculation of capitalization rates
Today there are several methods for calculating the capitalization ratio. This parameter can be calculated for total income an enterprise that includes net or balance sheet profit. The calculation can also be made from cash flow accounting, consisting of certain type profit and depreciation. Much depends on how much the company is valued.
Good day, my dear visitors and readers. Today we will talk about the level of capitalization of the company and what can negatively affect it. Yes, this topic is quite far from trading and cryptocurrencies, but, from the point of view of economics and general development, I think this topic will be useful.
In addition, the company's capitalization valuation is very important factor, which must be taken into account. If you are a potential investor and want to invest in shares of a particular company, then assessing the level of capitalization is important issue, which you should take into account. So I'll try in simple language explain what could negatively affect the level of capitalization itself.
RISK OF CHANGES IN PRODUCT PRICES
There is always a risk that sharp fluctuations in the prices of a particular product may negatively affect the core enterprise and its level of capitalization. For example, if a company sells goods, then a sharp increase in these goods will be profitable and, conversely, if the price of goods decreases, then it will be unprofitable for the company and its level of capitalization may fall.
On the other hand, if a specialized company is engaged in the purchase of goods, then a decrease in their cost will play into the hands of both it and the level of capitalization, but an increase in this cost will be a negative factor for the company and the level of capitalization.
Since here we're talking about about price, then it would be appropriate to look at how to approach the issue when it is important.
But, in fact, I will say that these risks can affect even those enterprises that have nothing to do with goods. For example, a sharp increase in the cost of goods may force the population of a particular country to save money, which, of course, will affect the service sector in general.
NEGATIVE MEDIA COVERAGE
This is a direct risk that the company's business and capitalization level may suffer from negative media coverage. The flow of news today is limitless, so no company can insure itself against it.
For example, the news about the accident at the Fukushima nuclear power plant in 2011 caused a wild resonance in the market, and the shares of many Japanese companies simply fell sharply in price, and with it the level of capitalization. The market is people, and people tend to panic, so this or that news can cause wild reaction market. It is clear that more global news can cause even larger troubles, ranging from stock market crashes to a deep crisis in the country.
It is worth understanding that the market is a reflection of people’s opinions. People can react ambiguously to various force majeure circumstances, because emotions come into play. And where there are emotions, there is no place for cold calculation, and accordingly, it is impossible to predict the reaction, which is why after the publication of unexpected news, the market can flounder terribly!
RISK OF RATING CHANGE
As a rule, there is a so-called credit rating, within which the company is assigned a certain economic rating, which may change over time. There is something like this for those companies whose shares are traded on the stock exchange. In this case, there is a special analyst rating, where shares are given certain ratings.
It is clear that such expert assessments can become a serious psychological trigger. For example, imagine that a company's stock had a high valuation, but a year later when new valuations are issued, it turned out to be significantly worse than the previous year. It is clear that this may have a negative impact on the level of capitalization, which will be a consequence of a fall in the level of stock prices, as investors will simply begin to sell them off.
WATCH VIDEO PREVIEW OF THE ARTICLE
Again, there is a subtle psychological thread at work here. It shows once again that behind all these prices there are people, their expectations, hopes, fears and intentions. These various ratings are often monitored by investors, and based on this information, they then think about what to do with their investments in the future.
RISK OF BECOMING AN ANACHRONISM
This is the risk that the company's business may become something like a dinosaur, only in economic terms. It is worth understanding that there are not many truly successful companies, and even fewer are those companies that have been operating for a very long time, that is, live to see their 100th anniversary.
The market is very dynamic, it is changing, therefore, if the company does not adapt to it and change the business concept at the right times, then it may well become that same dinosaur. The market is, first of all, fierce competition, and with further improvement modern technologies, this competition is becoming even more intense. In this case, over time, a competitor may always appear who will provide a similar product, but more High Quality and at a reduced price. It is clear that then the company will systematically fall into stagnation, and then it will not be far from bankruptcy.
DETECTION OF PARTS BY ORGANS
In this case, we are talking about the fact that a conditional auditor can find some juicy details from the company that can lead to the collapse of the system itself. It could be anything: theft by management, fraud, false reporting, etc.
If such information comes to light, it could cause irreparable damage to the company's image. After such a serious blow it will be very difficult to survive. In fact, such cases are not isolated, for example, the ENRON company.
LEGISLATIVE RISK
Here we are talking about the relationship between the direction of business and the current legislation. In this case, the government may impose restrictions specifically on the company or on the industry as a whole. It is clear that all this will negatively affect the investments of people who have invested their money in a company or industry.
Theoretically, the government acts as a kind of buffer between business and the population of the country. The government will intervene whenever business clearly puts pressure on society or fails to self-regulate. But in reality, governments often play it safe, initiating, sometimes, completely stupid laws that unreasonably put pressure on business.
INFLATION AND INTEREST RATES
For example, if interest rates rise, a business that needs financing may face problems. Roughly speaking, the costs of this company will increase, and it will be much more difficult to stay afloat.
For example, if increasing interest rates goes at the level of inflation, then the company may face problems as the purchasing power of money falls. In general, inflation and rising interest rates can occur separately or simultaneously, which can have a negative effect on a company.
RISK MODEL
There is always a risk that the overall model or concept that underpins the business may become incorrect. The companies that use it suffer from the wrong model. In this case, a certain domino effect can often turn on when large companies Other smaller companies will be pulled to the bottom.
For example, the mortgage crisis that took place in the period 2008-2009 clearly showed that an initially incorrect model can have serious negative influences even on the economies of large countries.
CONCLUSIONS
In general, if we talk about risks, then I say once again that risks are part of business, and there is no way to displace them. There is no company, line of business, or even economy that is not exposed to risks. In addition, I would like to remind you that the market is a living ecosystem that is capable of reacting very aggressively to any market changes.
The point is that markets are not always rational. Any force majeure news has a very strong impact on the market. As I have repeatedly said, where there are emotions, there is no rationality, and accordingly, predicting something no longer makes any sense.
In general, business and trading have a lot in common. I would say that trading is a certain line of business, therefore, in order to be successful here, you must first of all think like a real businessman. Business acumen, they either have it or they don’t, it’s very simple!
Well, here is the material, and I hope it will be useful to you. I will say goodbye to you, wish you good luck and see you again!
Capitalization – the value of a company on the market
A company's capitalization is the total current value of its shares traded on the market (the market, exchange value of one share is also called its capitalization).
K comp = N ordinary * P ordinary + K prev * P prev,
where P ordinary, P private – respectively, the market value of ordinary and preferred shares.
The market price of ordinary shares is RUB 18.15.
K comp = 746,018,770,000 * 18.15 + 263,300,742,000 * 18.15 = 18,319,149. 14 million rubles.
Capitalization ratios - the ratio of borrowed funds and total capitalization. Capitalization ratios reflect the degree to which a company uses its equity capital effectively.
share of bonds
K region = (par value of bonds / (nominal value of bonds + nominal value of ordinary shares + nominal value of shares + profit for distribution)) * 100% = (10,156,672 / (10,156,672 + 37 300 938. 45 + 6 582 518. 55 + 3 423 101)) * 100% = 17.6%
share of ordinary shares
K ordinary = (par value of ordinary shares / (nominal value of bonds + nominal value of ordinary shares + nominal value of preferential shares + profit to distribution)) * 100% = (37,300,938.45 / ( 10 156 672 + 37 300 938. 45 + 6 582 518. 55 + 3 423 101)) * 100% = 64.9%
specific preference shares
To the region = (nominal value of preferred shares / (nominal value of bonds + nominal value of ordinary shares + nominal value of preferred shares + profit to distribution)) * 100% = (6 582 518, 55 / (10 156 672 + 37 300 938. 45 + 6 582 518, 55 + 3 423 101)) * 100% = 11,4%
Conclusion
So, a security is not money or a material commodity. Its value lies in the rights that it, as a specific monetary document, gives to its owner. Changes in the ratios of various property rights regarding ownership and lending, disposal and management of securities form the basis of the stock market.
Based on the calculations of the value of securities of KAMAZ OJSC, the following conclusions can be drawn:
· As of December 31, 2007, the authorized capital of KAMAZ OJSC is made up of the par value of the issued ordinary and preferred shares of KAMAZ OJSC in the amount of 746,018,770,000 pieces in the amount of 37,300,938.45 million rubles. and 263,300,742,000 pieces in the amount of 6,582,518.55 million rubles. respectively;
· The amount of the authorized capital of KAMAZ OJSC as of December 31, 2007. amounts to 43,883,457 million rubles;
· The net working capital of KAMAZ OJSC is 12,998,265 million rubles . Net working capital is necessary to maintain the financial stability of the enterprise, since excess working capital over short-term liabilities means that the company not only can pay off its short-term liabilities, but also has financial resources to expand its activities in the future.
· Liquid capital is 18,764,725 million rubles. Net liquid assets are equal to 6,798,039 million rubles. and shows that the liabilities on the balance sheet are covered by assets.
· The inventory turnover ratio is 3.66, that is, inventory goes through 3.66 cycles of complete renewal or complete sale over a certain period of time;
· Net tangible assets per 1 bond issued in circulation amount to RUB 1,893,350 .
· Net tangible assets per 1 preferred and ordinary share issued are RUB 170, respectively. and 10 rub. according to data accounting and reporting;
· Profitability ratio of KAMAZ OJSC from production activities equal to 6.28%;
· The profitability ratio is 5.27%, that is, every ruble products sold brought 5.27% profit;
· The current yield on the bonds, declared by the issuer, is 25% of the nominal value of the bonds, in monetary terms this amount is RUB 25,289,168 million .;
· Having calculated the return on share capital, we found that for every ruble of capital there are 10 kopecks of net profit. For 1 placed share there are 1.1 rubles. authorized capital;
· The financial leverage ratio of KAMAZ OJSC is 1.47. Borrowed funds exceed equity, but not significantly. Financial leverage allows you to optimize the ratio between equity and borrowed funds in order to maximize return on equity. The quantitative expression of financial leverage shows an increase net profitability own funds due to the use of borrowed funds;
· Specific gravity securities in the equity capital of KAMAZ OJSC is:
Corporate bonds – 17.6%
Ordinary shares – 64.9%
Preferred shares – 11.4%
· The capitalization of KAMAZ OJSC is 18,319,149.14 million rubles. Today, the market value of ordinary shares is 18.15 rubles. Capitalization level of KAMAZ OJSC for last years has increased significantly.
According to the AK&M agency for the reporting year, KAMAZ OJSC ranks 18th in the ranking of shares in terms of growth in market capitalization of enterprises at the end of December 2007. Such a rapid growth in the company’s capitalization is caused by several factors:
· fundamental undervaluation of the company's shares, which existed before 2007, as a result of the consequences of “market distrust” in the company’s ability to overcome the consequences of the financial crisis of the 90s caused by default Russian economy;
· significant improvement in the financial and operational performance of the company in 2006 and 2007, favorable forecasts for further development;
investor interest in companies whose growth is directly related to infrastructure development in Russian Federation;
· increasing the transparency of the company: since 2007, the company has been regularly releasing financial statements in accordance with IFRS ( international standards financial statements) audited by PricewaterhouseCoopers;
· increasing the openness of the company: KAMAZ began to regularly hold meetings with investors and bank analysts, participate in conferences and organized an investor relations department;
· repurchase of own shares in the amount of 10% and their further redemption and reduction of the authorized capital carried out in 2007;
In general, during the period from 2000 to 2007, the capitalization of KAMAZ OJSC increased by 24.4 times. As a result, among mechanical engineering enterprises, KAMAZ OJSC ranks second in terms of capitalization at the end of 2007.
It is planned to sell a stake in KAMAZ OJSC to strategic investor Daimler AG in 2009 at a price higher than the current market value, which currently does not reflect the fundamental value of the company, and may become a driver of growth in KAMAZ stock prices in the short term. In addition, thanks to the development of cooperation with a large successful foreign company operating in the market for the production of trucks, the fundamental value of KAMAZ OJSC should increase in the long term due to the implementation of new projects to expand the model range and improve the consumer properties of its products.
In addition, the sale of a stake to a strategic investor will allow KAMAZ to gain access to its partner’s technologies, which will allow it to expand the lineup and improve consumer properties products. This will have a positive impact on the fundamental value of the company in the long term. In turn, Daimler AG will gain access to the rapidly growing Russian market, about one third of which is occupied by KAMAZ OJSC.
According to experts, the fair value of 1 ordinary share of KAMAZ OJSC is $3.44, which implies a growth potential of 107% and corresponds to a “Buy” recommendation.
Bibliography
1. Galavanov V. A. Securities market: Textbook. – 2nd ed., revised. and additional – M.: Finance and Statistics, 2006. – 448 p.: ill.
A method of financing in which a firm purchases new capital in exchange for securities that provide ownership of the company. Unlike credit financing, where in the case of normal servicing of financing there is no transfer of rights to a share of ownership, investments require that the investor acquires a share of ownership in one way or another. The direct method, in which an investor purchases ordinary shares, is practiced in a number of countries, including Russia. In countries with developed financial laws, particularly the US and UK, firms often resort to issuing derivatives and equity contracts. The most popular methods:
- Convertible preferred shares of various classes (convertible preferred stock) - as a way of investing by venture funds;
- Convertible notes - for angel investments that involve subsequent venture investments;
- Warrants are documents giving the right to purchase securities at a fixed price.
In addition, startups practice issuing options and restricted stock to reward and motivate employees, but these securities are not a method of attracting investment - their price and volume of issue are usually symbolic or compensating.
The nominal parameters of an investment transaction are the purchase price securities and the number of securities purchased. These parameters are determined by the relationship:
Investment amount = Number of securities purchased × Price per security
Nominal parameters are not material - the same amount of investment can be expressed by any ratio of the number of securities and their prices. These parameters, in turn, are subject to the relationship:
Number of securities purchased = Total number of securities issued by the firm × Investor's share
Issued securities are those that the firm has transferred to their owners. Securities authorized but not issued are not included in the calculation of capital shares.
It should be noted that those securities that are collateral for derivatives on ordinary shares are also included in the calculation of the transaction parameters, although legally they are not “issued”. An investor's nominal interest, calculated using existing holders' interests only, is higher than the "fully diluted" interest determined for a hypothetical situation in which all derivatives on common stock are converted into common stock. This situation is quite real in the event of a takeover of a company, when all third-party derivatives issued by it, as a rule, come into execution automatically, and employee options may be subject to mandatory conversion immediately or with a delay of several months to a year. Acquiring firms will typically seek to convert employee options into their own equivalent options in order to continue to retain employees, but this is not a requirement.
The material parameters of the transaction, in addition to the amount of investment, is the value of the company. It is she who determines what share of property the new investor will acquire.
Investor's share = Investment amount / (Company value before investment + Investment amount)
In investment practice, the terms pre-money and post-money are often used to denote the value of a company at the time of investment and after investment. “Pre-investment value of the firm” and “pre-money” are equivalent and interchangeable terms. The value of the firm after investment is equal to the sum of the value of the firm before investment and the amount of money received as investment:
Post-money = Pre-money + investment amount
So, now you know enough words to speak with professional investors in a common bird language. The subject of this conversation will always be two amounts: the amount of investment and the current value of the company, or, as it is commonly called, market capitalization.
Market capitalization of the firm = Number of securities of the firm × Actual market value of one security of the firm
Market capitalization of a company is the price at which the company could be acquired entirely, based on the current actual value of its securities.
The question of how much an investment will cost a firm comes down to how much investment it needs and how much the firm is worth. We have already learned to calculate the amount of investment. The question remains: how much is the company worth and can this amount be calculated?
The company has the following properties:
- Ability to create cash flow
- Current market price
- Opportunity to be sold at a higher price
These properties of a company correspond to three main ways of calculating the value of a company:
- Method of comparable indicators (comparables)
- Negotiation
We have already discussed the DCF method in detail earlier. Let's look at the other two methods.
The comparable indicators method assumes that companies with similar properties should be worth similar amounts under the same conditions. Suppose that there are two firms A and B, the key metric of which relates to each other as Sa/Sb, and in all other respects these firms are similar to each other: they have the same type of activity, cost structure, demand structure, etc. It is known that the market capitalization of firm A is equal to the sum of N. The method of comparable indicators assumes that the market capitalization of firm B is equal to (N × Sa/Sb).
This method is most often used in cases where the market is opaque or illiquid. For example, the following ratios can be used as comparable indicators:
| PE Ratio | Price-Earnings Ratio PE = Capitalization / Company Profit |
| PS Ratio | Price-Sales Ratio PS = Capitalization / Company Sales |
| Price Book Ratio | Price Book Ratio PB = Capitalization / Company Assets |
| ROE | Return on Equity ROE = Net Profit / Equity |
| Days" Sales in Cash | Days" Sales in Cash DSC = Cash & Equivalents / Daily Sales Volume |
If firms' financial results are unreliable, non-financial metrics can be used. Valuation of companies “by assets”, “by production capacity” is quite common in emerging markets, and in online business, the recognized measure is “eyeballs” - based on the size of the audience of a resource or application.
When using this method, it is necessary to take into account that, as a rule, not just the same indicators are comparable, but the same indicators obtained in the same or close time periods. The capitalization of firms is determined by the market, and its level can fluctuate significantly.
The third method, negotiation, involves the investor determining the price based on his cost of capital and expected return. He, as it were, sells capital to the company at the current market price. In this case, the calculation factors are the investment horizon, the required return and the expected exit price of the company, which allows us to determine the maximum price at which the investor is willing to value the company now. In addition, business customs matter: for example, the generally accepted aggregate angel stake in a convertible note is around 20%, while venture capital funds most often take stakes between 20% and 40%, and almost never above 50% (the latter is related with accounting policies requiring the consolidation of controlling interests in the reporting of the owner company, and the associated tax consequences). Knowing the amount of investment, the desired return and the accepted shares, the parties determine the terms of the transaction during negotiations, taking into account these restrictions.
It is this last method that is most often used in actual investment practice, and in the case of startups, it is practically the only one.
But no matter what method an analyst uses to determine the value of a company, the only reliable way to accurately determine its value is the actual investment transaction that has taken place, which determines the market capitalization. As long as there is no real money behind the assessment, it is simply an intellectual exercise. The criterion of investment truth is only the market, whatever it may be.
