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Simple English definitions for legal terms
capitalization
Read a random definition: Parenthetical
A quick definition of capitalization:
Capitalization is when you spread out the cost of something over many years. This helps keep track of how much money a company makes and how much they spend. It also helps people who pay taxes because they can spread out big expenses over many years too. In finance, capitalization means how much a company is worth based on how much money they have and how much their stocks are worth. This helps investors decide if a company is doing well or not.
A more thorough explanation:
Capitalization has different meanings depending on the context. In tax and accounting, it refers to the allocation of costs across multiple periods. This is done to keep an accurate accounting of an organization and to comply with tax laws. For example, if a company buys a large asset, such as a van, tax laws require the asset to be capitalized, and the company can take depreciations for the asset to lower their taxes over multiple years.
In finance, capitalization refers to the amount of outstanding stock, debt, and retained earnings (book value), or market capitalization. Book value essentially refers to a company’s value if it became liquidated and can be calculated by subtracting its liabilities from its total assets. The market capitalization simply means the value of all the outstanding stocks which can be calculated by multiplying the outstanding stocks by the current share price.
Investors often refer to a company as over or under capitalized based on the company’s ability to make payments to creditors and investors.
For example, if XYZ Co. has a lot of debt and not enough earnings to make payments to creditors and investors, it may be considered overcapitalized. On the other hand, if ABC Co. has a lot of earnings and not enough debt, it may be considered undercapitalized.