Market Capitalization

by Joshua Malone

Market capitalization is one of the go-to statistics for surety underwriters when evaluating a public corporation’s financial information. The market capitalization (commonly referred to as “market cap” for short) represents the value of the corporation’s outstanding shares and thus basically the value of the company. If an investor wanted to try and purchase a corporation via the market, he would theoretically have to pay the market cap value.

Market cap equals outstanding shares multiplied by the price per share. So for example, Target Corporation (NYSE: TGT) has a $39.7 billion market cap and $68.2 per share, so $39.7 billion divided by $68.2 per share equals 582 million outstanding shares.

Surety underwriters initially look at market cap to get some idea of the corporation’s size. As a general rule of thumb, big market caps exceed $10 billion. Middle market caps range from about $1 or 2 billion to $10 billion, and smaller caps equal less than $1 billion. The larger the market cap, the bigger the corporation. Thus, an underwriter will more likely approve the issuance of the corporation’s bond.

Depending on the bond amount and the market cap, some surety bond applicants can easily obtain various litigation bonds such as TROs, preliminary injunctions, and appeals without having to provide collateral. For example, Wal-Mart Stores, Inc. (NYSE-WMT) has a market cap of $264 billion. If Wal-Mart needed a $1 million dollar court bond, surety underwriters wouldn’t have much difficulty approving the bond. However, a corporation with a smaller market cap may need to post collateral or meet other requirements to obtain such a bond.

In sum, the market cap provides a quick frame of reference, as well as excellent starting point, for an underwriter to evaluate a corporation’s application. Public corporations have much of their financial data – including market cap – on business websites such as Google, Yahoo! and Bloomberg.

Please note: all example math figures are based on estimates from Yahoo! Finance as of the date of this article.

Comparing Target and Wal-Mart - Market Capitalization

Comparing Target and Wal-Mart – Market Capitalization

 

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