Many investors feel that cash is king. They use the present value of future cash flows in order to estimate the current market value of stock. The current market value of stock multiplied by the number of shares outstanding is referred to as market capitalization. Cash to market capitalization is a ratio used to measure firm liquidity, among other things.
The balance sheet provides investors with a list of company assets starting with cash, since it is the most liquid asset a company can hold. The amount of cash a company has on hand is usually a function of the industry. It may also be due to management, as cash on hand can attract potential buyers that will use the cash as leverage to obtain additional buyout funds.
Market capitalization is calculated by multiplying the current price of the stock by the number of shares outstanding. The current price of the stock can be obtained from your favorite investment research site. The number of shares outstanding can be obtained from the balance sheet.
Analysts use both assets and market capitalization to understand the size of a company. While some companies may carry few assets, they may also have a large market capitalization, which means they can raise capital if necessary. Market capitalization also provides insight into how the market values the company. Market capitalization should be higher than assets to account for the value of the company brand and human capital.
The ratio of cash to market capitalization provides a measure of company liquidity and cash position. In general, a company with a ratio over 10 percent is considered to be financially healthy, however, the best way to use ratios is to measure against other companies in the same industry, especially primary competitors.
- SEC: Market Capitalization
- Motley Fool: How to Read a Balance Sheet: Working Capital
- Wilshire. "Wilshire 5000 Total Market Index: Fundamental Characteristics." Accessed Nov. 6, 2020.
- Wilshire. "Wilshire 5000 Total Market Index: Fact Sheet." Accessed Nov. 6, 2020.
- PricewaterhouseCoopers. "Global Top 100 Companies by Market Capitalization July 2020," Page 11. Accessed Nov. 6, 2020.
James Collins has worked as a freelance writer since 2005. His work appears online, focusing on business and financial topics. He holds a Bachelor of Science in horticulture science from Pennsylvania State University.