How markets workIntermediate

Market cap, shares and free float

Capitalization, enterprise value and free float answer different questions: how much the equity is worth, how much the operating business costs and how much of it can actually be traded.

3 min read Practical guide

By the end

You will avoid comparing companies by the unit price of their shares.

Capitalization

Capitalization = price × diluted shares. Use the diluted number if there are options, convertibles or stock compensation. A €5 share may represent a more expensive company than another €500 share.

Enterprise value

EV approximates the value of the business for all financiers: capitalization + debt and other rights − available cash. It is useful when comparing operations with different capital structures, but requires adjusting leases, pensions or non-operating interests.

Example

Company A: capitalization 1,000, debt 600 and cash 100; EV 1,500. Company B: capitalization 1,200 without debt and cash 300; EV 900. B has more stock market value, but his business costs less.

Free float and liquidity

The free float excludes strategic holdings that rarely trade. A small float increases sensitivity to orders, volatility and squeeze risk. It does not determine quality, but it does determine the ease and cost of entering or leaving.

Testing

Look for basic and diluted shares, debt, cash and significant shareholders in official documents. Do not mix data from different dates: current price with debt from several quarters ago can deform EV.

Diluted shares.

Debt and cash of the same date.

Convertibles and options.

Free float and traded volume.

From data to a decision

Does price reflect size and tradability?

This guide cannot predict the next move on its own. It can build a conditional reading: what supports upside, what increases downside risk, and which evidence must appear before acting.

Favourable reading

Market cap and free float reveal actual scale and tradability.

Adverse reading

A low share price is wrongly interpreted as a cheap company.

Required confirmation

Multiply price by diluted shares and check free float and volume.

Reasoned example

A $5 stock with one billion shares is worth more than a $100 stock with ten million.

Applied workshop

Turn the explanation into a process

Follow these steps in order and keep the result, so you can repeat the analysis and identify what changed your decision.

1Multiply price by diluted shares to obtain equity value.
2Add debt, subtract operationally available cash and adjust minorities to approximate enterprise value.
3Compare basic and diluted shares to detect options, convertibles and compensation.
4Review free float and dollar volume to estimate liquidity and sensitivity to forced selling.

Review questions

Are you comparing equity or the whole business?
Will the share count grow?
Does a controlling stake limit real tradability?

Worked case

Low price, big company

A is listed at €4 with 2,000 million shares: capitalized at 8,000 M. B is listed at €200 with 20 million: capitalized at 4,000 M. A costs less per share, but is worth twice as much on the stock market.

If A has 5,000 M of debt and 500 M of cash, its EV is around 12,500 M. The 20% free float can also increase volatility and execution cost.

Decision rule

Use diluted capitalization for equity, EV for operation and free float for tradability.

Put it into practice

Calculate capitalization and EV of two competitors and explain why the cheapest per share is not necessarily the cheapest as a business.