Capitalization
Candlefocus EditorIn accounting, capitalization allows for an asset—machinery, vehicles, buildings, etc.—to be spread out over its useful life, appearing on the balance sheet rather than the income statement. This has the effect of smoothing out depreciation costs in order to match the period when benefit is received to when costs are recognized. Capitalized assets appear as an “asset” on the balance sheet, representing the cumulative total of all capitalized expenses plus the remaining book value of the asset.
When referring to finance and company size, capitalization typically pertains to the book value or the total of a company’s debt and equity. Companies that are undercapitalized do not have enough working capital on hand to meet all their obligations, leading the company to be more vulnerable to economic shocks.
Market capitalization is an important measure of a company’s size that is calculated as the current market price multiplied by the total number of outstanding shares. This is often referred to as the market cap of a company, and it provides investors a quick metric for evaluating its size and relative worth. It is also used by banks and other lending agencies when assessing the risk of a loan.
Capitalization is an important concept in both accounting and finance, and is a measure of a company’s size that has direct implications in assessing risk, understanding a company’s value, and helping to smooth out expenses. It is important to recognize both the accounting and the investment perspective in order to understand the full implications of capitalization.