The overall capitalization rate and its calculation

In various sources is quite a lot of attention is paid to what is capitalization rate and how is it calculated. However, the category of “the overall capitalization rate" needs some additional explanation.

It is calculated as quotient from dividing the operating profit by the value of the total amount of the sales price of all produced by the company or company products. This figure includes the value and return of investment, and the value of their yield. Determined by this technique figure excludes debt - thus, the assumption that the company has no long-term debt. This value is then summed with the total market value. This is done thus: it is assumed that long-term debt acts as a part of the equity of the company. After that, the net value produced by the company or company products (calculated according to the values before taxes) consists of depreciation charges, as well as those costs incurred by the company for the payment of interest.

Long-term debt is added to the equity capital of the company in the assets side of the balance. Further, according to the same procedure, to the profit plus the amount of interest accrued on the entire aggregate value of the debt. These articles are perfectly valid exceptions (deductions), and therefore are not sufficient and even more binding basis for the return of investment. Here is the result we get such an overall capitalization rate that reflects the value of the total return (resulting from amortization and depreciation) and the value of the total profits (including interest) in respect of the sum of own capital of the enterprise or company and borrowed funds.

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To illustrate how the capitalization rate, the calculation of which is performed in a similar way, suppose that the data for this calculation, the selected data at JSC. Imagine this technique in step-by-step form.

Step 1. Here is the definition of the aggregate value of shares of the company or of the company. This uses the average value of the period which is most relevant from the point of view of the stability of market factors. This average price of the asset is multiplied by the number of ordinary shares that are issued for the selected period. In addition, you should consider the possibility of making some amendments to the calculation when accounting for preferred shares. The final value is the total market value of the assets of the company.

Step 2. At this stage of the calculation adds the values of long-term debt during the selected period the sum of the prices of all ordinary shares.

Step 3. Here the company's net profit, calculated before the payment of taxes, added to the amount of depreciation expense.

Step 4. In this phase the amount of net income and depreciation expenses divided by the sum value, which is obtained from adding the market value of the assets and long term debt. In the end, we get a figure that characterizes the overall capitalization rate.

Step 5. Here is calculated the net profit before tax and value depreciation expense and interest deductions.

Step 6. The value obtained in the previous calculation is divided by the consolidated rate, the rate of which is determined on the basis of information from the enterprise database. If there are none, or if they are insufficient, an alternative method is used that determines the capitalization rate. The property, bringing the company profits, as a subject of calculation in this case is also not taken into account. This alternative method is based on the sequential procedure of summation indices.

Step 7. Here dividing the amount of net profit and depreciation on the value of the total bet. The result is the full price of own capital of the enterprise or the company, taking into account the amount of debt.

It Should be noted that in these calculations it was assumed that long-term debt was accepted as part of equity. Naturally, when calculating the estimated company will need to produce a subtraction value of long-term debt from the value of equity.