Share price/MCAP, what do they actually tell us?
If you look at a share price graph, am I right in saying that it can tell a story that is completely irrelevant to performance (or the market sentiment on performance)- and share price alone provides no concrete insight into the market’s sentiment on the stock?
Say a business grows steadily, at 20%pa. Face value says you’d expect the share price to do something somewhat similar. But if the company is constantly issuing new shares, or performing stock-splits in share capital each year in such a way that X = shares at start of the year, and Y = shares at the end of the year, and Y = X *(1- % growth rate). This way the share price (whilst MCAP would be growing) would stay at roughly the exact same price.
This is the most basic point I’ll make on share price movement alone & when analysed alongside mcap, but I’m aware there are share buy-backs and I’m sure a multitude of other equity based manipulation tactics that can influence stock price too.
So am I right in saying that, fundamentally, MCAP is a better proxy for performance; or one step further, proxy for the market’s sentiment on the company’s performance, than share price.
Can someone with their head screwed on pls confirm or correct me, and please could they also share anymore wisdom, resources or books as to where I can gain a rock-solid understanding of PublicCo capital structure and mechanics.
Many thanks
Market capitalization (MCAP) is indeed a more comprehensive metric than share price alone when evaluating a company's performance or the market's sentiment about it. Here's why:
Share Price Alone is Limited: A share price only reflects the value of a single share, which can be influenced by factors like stock splits, share issuances, or buybacks. These corporate actions can distort the share price without necessarily reflecting changes in the company's actual value or performance.
MCAP Reflects Total Equity Value: Market capitalization, calculated as the share price multiplied by the total number of outstanding shares, provides a better measure of the company's total equity value. It accounts for changes in the number of shares, making it a more stable and reliable indicator of the market's valuation of the company.
Growth and Share Issuance: As you pointed out, a company growing at 20% annually might not see a corresponding increase in share price if it is issuing new shares at a similar rate. In such cases, the MCAP would still reflect the growth in the company's value, while the share price might remain flat.
Market Sentiment and MCAP: MCAP is a better proxy for market sentiment because it captures the combined effect of share price and the number of shares outstanding. It reflects how the market values the company's equity as a whole, considering factors like growth prospects, profitability, and risk.
Equity-Based Manipulation: Share buybacks, stock splits, and other corporate actions can influence share price, but their impact on MCAP is more transparent. For example, a buyback reduces the number of shares outstanding, which might increase the share price but leave the MCAP unchanged if the market's valuation of the company remains the same.
Additional Resources for Understanding PublicCo Capital Structure and Mechanics:
In summary, you're absolutely correct that MCAP is a more reliable metric than share price alone for gauging performance and market sentiment. Share price can be misleading without context, while MCAP provides a holistic view of the company's equity value. Keep diving into valuation and capital structure topics to solidify your understanding!
Sources: Why is market cap / equity value useful?, POPULAR ACCOUNTING/FINANCE QUESTIONS, Investment Banking Interview Questions - 15 Answers to Land the Job, Net debt: The definite list, The Mechanics of a Mispricing
FYI, data sources backwardly adjust for issuance, stock splits, and dividends for the reasons you mentioned above.
Also, might as well go one step further and look at enterprise value. Better yet, contextualize price with how much earnings you’re buying, and look at P/E or EV/EBITDA.
How do data sources backwardly adjust for the aforementioned, & what are data sources? Like ER?
I don’t mean to be rude, but have you really worked in IB for 2 years?
I’m referencing anywhere you’d get market data from... Yahoo Finance, Google Finance, Factset, CapIQ, Bloomberg.
Yes, nominal prices of common shares are completely arbitrary in nature and largely meaningless when it comes to valuation. Next question
What are the first things you look at in a public co to form an understanding of, and perception of value for, a stock.
Qualitative & quantitative.
https://www.wallstreetprep.com/topics/valuation
You have it completely wrong and upside-down. What matters is stock price, not market cap. You could increase market cap by issuing new shares or merging with other companies, but that doesn't necessarily create "per share" value.
The best measure of value creation is stock price. Of course there is irrationality in markets, manias, bubbles, short squeezes and meme stocks. But still it's stock price you should focus on.
Market cap is useful as a quick and dirty metric for liquidity
Until you realize there’s barely a float lol
Market cap and stock price are two sides of the same coin. Both are not great at telling you what’s happening to the business. Market cap has the same problems as stock price because it is stock price x shares lol.
In other words, if market cap is up 5%, that means stock price + share chg = 5%.
But, the the stock price could be up 5% because it has a beta of 1 and SPX is up 5%. Stock could actually be down 30% on a 3yr basis as the company is growing sales at a 15%+ clip.
Stock price chg = good stock
Stock price chg / market cap =! Good/bad company
So how do stock splits work in our discussion on share price change?
So if the stock is split in half. The share price is cut in half, however the business doesn’t change, but the EPS does right?
Let me know if I’m thinking about this the wrong way.
Stock price today $100, eps of $50, 1000 shares = 2x PE, $10k market cap.
Stock split 2:1
Stock price tomorrow $50, eps of $25, 2000 shares= 2x PE, $10k market cap.
With the new share count you divide the historical stock price and per share data by the new divisor = stock adjusted price & eps.
Because a stock split does not dilute ownership, the net effect to valuation is 0. You do not increase your ownership, and the value of what you own did not change.
Tl;dr you’re over thinking it.
You don't seem to understand. A company's market cap can go up 50% and its stock price be down over the same period.
The reverse is also possible, say via a massive buyback program. In both cases, you want to focus on stock price, not market cap.
do you, as a shareholder, make money when stock price or market cap increases? seems pretty straightforward to me.
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