Sit down with a stack of personal-finance magazines or watch a business news channel for a while, and you'll discover there are a million and one "metrics" you can use to measure and compare companies. If you're unfamiliar with the language, the difference between "market cap" and "revenue" may seem obscure, but they represent fundamentally different things: Market cap is a measure of value, while revenue helps you evaluate performance.
When you see a company referred to as a "multibillion-dollar corporation" or read that it's "one of the 10 (or 100 or 500) most valuable companies in the world," that's usually a reference to its market capitalization. This "market cap" is the total market value of a corporation's outstanding shares. Those are the shares of company stock that are out there in the world, in the hands of people who can choose to sell them. If a company has 500 million shares of stock outstanding, and the current share price is $10 a share, the company has a market cap of $5 billion. Whenever the share price changes, so does the market cap.
What Market Cap Tells You
Market cap tells you what investors as a whole think a company is really worth. In most cases, the market cap of a publicly traded company will be higher -- often much, much higher -- than the sum total of its assets and liabilities. That's because the value transcends such things as the buildings it owns. Its true value also includes the status of the company's brands and reputation, the abilities of its management, its market position and its growth potential. Those things don't show up on the balance sheet, but they do affect how much people are willing to pay for the company's stock -- and thus its market cap.
As important as it is to understand what revenue is, it's perhaps more important to understand what it is not: Revenue is not profit. Revenue is just the money that flows into a company in the course of business. If the company's revenue exceeds its expenses, it has a profit. If it does not, the company has lost money. When you go into a store and hand over $40 for a pair of shoes, that $40 is revenue for the store. Out of that $40, the company has to pay the wholesale cost of the shoes, plus a portion of the wages of the employees who waited on you. They're also paying rent for the space in the mall, as well as taxes and utilities. In business accounting, revenue is the "top line." The famous bottom line, after all the expenses have been subtracted, is profit.
What Revenue Tells You
Simply knowing how much a company is bringing in might not tell you much. You need to know its expenses, and whether the ratio of its expenses to its revenue is good or bad for the industry in which it competes. In general, though, revenue growth is usually good. A company bringing in steady revenue figures to make some profit as long as the costs of attracting that new revenue -- such as advertising, promotions or distribution to new markets -- aren't too high. For an unprofitable company, increasing revenue is a path to profitability, if it can obtain that revenue growth without increasing expenses.
- "Financial Accounting for MBAs," Fourth Edition; Peter Easton, et al; 2010
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