What it is:
In the business world, capitalization has two meanings. The first meaning, also calledcapitalization, refers to the value of a company's . The formula for capitalization is:
How it works/Example:
Let's assume Company XYZ has 10 millionand the current share price is $9. Based on this information and the formula above, we can calculate that Company XYZ's capitalization is 10 million x $9 = $90 million.
In the second use of the term, let’s assume Company XYZ creates a new drainage system to prevent run-off rainwater from flooding the neighbor’s business. Because the costs associated with the change constitute an addition to the property and allows it to use the property as a concert venue, Company XYZ can those costs. So, instead of recording the costs as an expense on the balance sheet, which would lower the company’s net income, Company XYZ records the costs as an on the balance sheet. These assets then depreciate, which has a much smaller effect on net profits.
Why it Matters:
Capitalization reflects the theoretical value of a company, but this is usually not what the company could be purchased for in a normal factors may not be reflected in the price or the .transaction. One reason for this is that the value of material nonpublic information, management changes, operating synergies between the and the company, and other intangible
In thesense, capitalization is good for companies that want to keep as high as possible; however, it’s not as good for companies that want to pay as little in as possible (business expenses are tax-deductible; capitalized assets are not).