The total capitalization rate and its calculation

In various sources, much attention is paid to what the rate of capitalization is and how to calculate it. At the same time, the category "total capitalization rate" needs some additional explanations.

It is calculated as a quotient from dividing the amount of operating profit by the value of the total sum of the selling price of all products produced by the company or enterprise. This indicator includes the value of both the return on investment and the amount of their return. The indicator determined by this method excludes debts - thus it is assumed that the enterprise does not have a long-term debt. This value is then added to the total market value. This is done in this way: it is assumed that long-term debt is part of the company's equity. After that, the net value of the output produced by the enterprise or company (calculated on the basis of values before taxes) is added to the depreciation charges, as well as to the expenses incurred by the enterprise for interest payments.

Long-term debt is summed up with the value of the company's own capital in the asset balance. Further, according to the same methodology, the profit added to the value of interest accrued on the entire aggregate amount of debt. These articles are quite acceptable exceptions (deductions), and therefore do not act as a sufficient, and even more compelling, reason for the return of investment. So, in the end, we get a general capitalization rate that reflects the value of the cumulative return (arising from depreciation and depreciation), as well as the value of the total profit (including interest), relative to the amount of the company's own capital or company and borrowed funds.

To illustrate how the capitalization rate is calculated, the calculation of which is done in this manner, we assume that the information for the given JSC is selected for the given calculation. Let's imagine this technique in a step-by-step form.

Step 1. Here the total value of the share of the enterprise or company is determined. The average value of the period is used, which is the most indicative from the point of view of the stability of market factors. This average price of an asset is multiplied by the number of ordinary shares that are issued in turnover for a given selected period. In addition, one should take into account the possibility of making some amendments to the calculation when accounting for preferred shares. The final value is the total market value of the asset of the enterprise.

Step 2. At this stage of the calculation, the amount of long-term debt for the selected period is added to the sum of the prices of all ordinary shares.

Step 3. Here, the net profit of the enterprise, calculated before tax payments, is added to the amount of depreciation expenses.

Step 4. Within this stage, the amount of net profit and depreciation expense is divided by the value of the amount obtained from the addition of the market price of assets and long-term debt. As a result, we get the indicator that characterizes the general rate of capitalization.

Step 5. Here, the net profit before taxation and the value of depreciation and interest payments are calculated.

Step 6. The obtained value in the previous calculation is divided into a consolidated rate, the indicator of which is determined on the basis of information from the enterprise database. In the absence of such, or if they are insufficient, an alternative method is used, according to which the capitalization rate is determined. Real property, which brings profit to the enterprise, as a subject of calculation in this case is also not taken into account. This alternative method is based on the procedure of sequential summation of indicators.

Step 7. Here, the amount of net profit and depreciation is divided by the value of the total rate. The result is the total price of the company's own capital or company, taking into account the amount of borrowed funds.

It should be noted that with these calculations it was assumed that long-term debt was taken as part of equity. Naturally, when calculating for the company being valued, it will be necessary to subtract the amount of long-term debt from the equity price index.