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How market capitalisation works

Market capitalisation is share price times shares outstanding. A $50 share on 100,000,000 shares is $5,000,000,000. Against $250,000,000 of earnings that pile is a P/E of 20, the same 20 as $50 over $2.50 of EPS.

Price to earnings

20.0x

Market cap $5,000,000,000 over $250,000,000 of earnings.

Price per share
$50.00
Earnings per share
$2.50
Market cap
$5,000,000,000
Total earnings
$250,000,000
$
$

Trailing twelve months on a teaching sheet. Negative EPS makes P/E unusable.

In millions of shares. 100 here is 100,000,000 shares.

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Net debt

In short

  • Market cap is P×NP \times N. A $50 share and 100,000,000 shares is $5,000,000,000.
  • Total earnings are EPS times shares: $2.50 times 100,000,000 is $250,000,000. Market cap over earnings is 20, matching price over EPS.
  • Hold the price and raise EPS to $5.00: market cap is still $5,000,000,000, earnings are $500,000,000, P/E falls to 10.
  • An $80 share on 50,000,000 shares is a $4,000,000,000 cap and $125,000,000 of earnings, P/E 32.
  • How the P/E ratio works is the multiple. This page is the pile in the numerator of the totals route.

Price times the share count

Market capitalisation is the market value of the equity claim:

Market cap=P×N\text{Market cap} = P \times N

PP is the share price, NN the shares outstanding. A $50 share and 100,000,000 shares is $5,000,000,000.

Earnings per share times the same count is total earnings: $2.50 times 100,000,000 is $250,000,000. Divide the pile by the earnings and you have P/E of 20, the same 20 as 50/2.5050 / 2.50. The price to earnings calculator on this page is both routes.

How the P/E ratio works owns the multiple. This page owns the scale. A 20 times stock on $5,000,000,000 is not a 20 times stock on $4,000,000,000.

Earnings can move without the cap moving

Keep the $50 price and 100,000,000 shares. Raise EPS to $5.00. Market cap is still $5,000,000,000. Total earnings are now $500,000,000. P/E falls to 10. Earnings yield rises to 10 percent.

The firm did not get smaller. The year got more profitable. Sorting on market cap would not have moved this name. Sorting on P/E would have.

A higher price on a smaller count

Price $80, EPS $2.50, shares 50,000,000. Market cap is $4,000,000,000. Earnings are $125,000,000. P/E is 32. Yield is 3.125 percent.

The share is more expensive than $50. The firm is smaller than $5,000,000,000. Mixing a share price comparison with a firm-size comparison is how an $80 name looks larger than a $50 name that has twice the shares.

Market cap is not enterprise value

Market cap is the equity claim. Enterprise value is equity plus net debt, the claim on the operations. Adding debt and subtracting cash on a different sheet produces a different pile from the $5,000,000,000 cap on this P/E sheet. Do not paste another page's debt line onto this share count.

Enterprise value against equity value is that pair. Market cap against enterprise value is the same split named from this side.

Shares have to be the right count

Diluted shares, treasury shares, and a split the quote has not yet caught will print a cap that is not the cap. Type the count the price is quoted on. This calculator will multiply what it is given.

Market cap is also not a takeover price. Offer premium sits on top of the unaffected price. Control is a different claim.

What this page is not doing

It is not a ranking of cheapness, not an EV engine, and not a diluted-share model. The three sheets are a $5,000,000,000 cap on a $50 share (earnings $250,000,000, P/E 20), the same cap on $5.00 of EPS (earnings $500,000,000, P/E 10), and a $4,000,000,000 cap on an $80 share (earnings $125,000,000, P/E 32). This is educational material, not financial advice.

Worked examples

A \$50 share on 100,000,000 shares

Price $50, EPS $2.50, shares 100,000,000. What is market cap, and what is P/E?

  1. Market cap: 50×100000000=500000000050 \times 100000000 = 5000000000, so $5,000,000,000.
  2. Total earnings: 2.50×100000000=2500000002.50 \times 100000000 = 250000000, so $250,000,000.
  3. P/E from the share: 50/2.50=2050 / 2.50 = 20. From the totals: 5000000000/250000000=205000000000 / 250000000 = 20.

Market cap is $5,000,000,000. Earnings are $250,000,000. P/E is 20 either way.

The same cap on \$5.00 of EPS

Keep $50 and 100,000,000 shares. EPS is now $5.00. What is market cap?

  1. Market cap is still $5,000,000,000.
  2. Earnings: 5×100000000=5000000005 \times 100000000 = 500000000, so $500,000,000.
  3. P/E: 50/5=1050 / 5 = 10.

Market cap is still $5,000,000,000. Earnings are $500,000,000. P/E falls to 10.

An \$80 share on 50,000,000 shares

Price $80, EPS $2.50, shares 50,000,000. What is market cap?

  1. Market cap: 80×50000000=400000000080 \times 50000000 = 4000000000, so $4,000,000,000.
  2. Earnings: 2.50×50000000=1250000002.50 \times 50000000 = 125000000, so $125,000,000.
  3. P/E: 80/2.50=3280 / 2.50 = 32.

Market cap is $4,000,000,000. Earnings are $125,000,000. P/E is 32.

Common questions

Is market cap the takeover price?

No. It is price times shares. A bid sits at a premium to the unaffected price. That premium is a different identity.

Why does P/E match from totals?

Because multiplying price and EPS by the same share count cancels. Market cap over earnings is price over EPS.

Is a bigger cap a better firm?

It is a larger equity claim at today's price. It is not a quality score. This is educational material, not financial advice.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.