This ratio means that investors spend $48.42 billion, for $8.4 billion in equity (net assets).
In other words, they are willing to spend $5.76 for every $1 in net assets.
Why are they willing to spend so much?
There are a number of possible reasons:
1. The net assets of the company may be worth more, because the value of the company’s assets used for calculating its equity is based on their purchase price.
Just as a house can rise in value, a company’s assets can actually be worth more than what it paid for them.
2. A firm can produce significant profits from its assets, thereby making it worthwhile to pay more for the company than the net value of its assets.
The lower the ratio of market cap to equity, the lower the price that investors must pay for a portion of those assets.
The Ratio Of Market Cap To Shareholders’ Equity
Financial analysts have concluded that the P/E Ratio is more significant for industrial and commercial enterprises, while the market cap to equity ratio is more relevant for companies in the real estate industry.
Note: These ratios are usually useless for analyzing young companies.
This is especially true with respect to start-up companies, whose value is usually measured by their potential, not their achievements.
Mirabilis, a famous example, was sold for $400 million, despite a complete lack of both profits and significant assets.
Related posts:
- What is the Stock Market?
- The Forex market of all US equity markets
- The FX market
- Investing in Utilities
- The S&P 500
