Explaining Market Cap

Analysts have been gawking about Market Cap recently as Nintendo’s market cap exceeded Sony’s. So I want to take some time to explain what this is.

Market Cap is simply the current share price multiplied by the shares available. Market Cap is simply a measure of a company’s preserved worth. Share prices are a measure of what investors are willing to pay for the company. The share price changes based on numerous different factors such as how much the company is earning or if investors think the company is going to do better or worse in the future. Market cap is not a measure of financial health per say. Market cap measures the company’s perceived worth

I’ve seen some confusion on what this means for the company. One Youtuber said that Nintendo had more money because they had a higher market cap. Market cap isn’t a measure of a company’s earnings or cash flow, per say. It’s just how much investors are willing to pay for the company.

Now, market cap is not perfect. Between industries, it may not be a very good measure. Wal-Mart (WMT) has a higher market cap of 224.74 billion while Google (GOOGL) has a market cap of 673.93 billion. Does this mean Google is a better company? Earnings per share for Wal-Mart is 16.99 while Google is 31.78. This means investors hyped up Google’s share price. This is very common for tech companies. For example, Amazon (AMZN) has a price to earnings ratio of 188.07.

Between industries, market cap remains a good measure of a company’s worth. The comparisons between Sony and Nintendo are fair as both companies primarily produce video games (at least Sony does now).So when analysts gawk about Nintendo’s market cap being higher than Sony, they are looking at Nintendo being a more valued company.

I hope you found this helpful. If you have any questions or what more articles like this, let me know in the comments below.

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