Various sources give quite a lot of attention to what the capitalization rate is and how it is calculated. At the same time, the category “general capitalization rate” needs some additional explanations.
It is calculated as the quotient of dividing the amount of operating profit by the value of the total amount of the selling price of all products manufactured by the company or enterprise. This indicator includes the value and return on investment, and the value of their return. The indicator determined by this method excludes debts - thus, it is assumed that the company does not have 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 products produced by the enterprise or company (calculated according to the values before taxes) is added up with depreciation deductions, as well as with the expenses incurred by the enterprise to pay interest.
Long-term debt is added up with the size of the company's equity in the asset balance. Further, by the same methodology, the amount of interest accrued on the entire aggregate amount of debt is added to profit. These articles are quite acceptable exceptions (deductions), and therefore do not appear to be sufficient, and even more so, a mandatory basis for the return on investment. So in the end, we get such a general capitalization rate that reflects the amount of the total return (arising from depreciation and depreciation), as well as the value of the total profit (including percentage), relative to the amount of equity of the enterprise or company and borrowed funds.
To illustrate how the capitalization rate is calculated, which is calculated in a similar way, suppose that the data for this calculation is selected for OJSC. We will present this technique step by step.
Step 1. Here is the determination of the total value of the shares of the enterprise or company. The average value of the period is used, which is the most indicative from the point of view of stability of market factors. This average asset price is multiplied by the number of ordinary shares that have been put into circulation for a given 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 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 up with the depreciation expense.
Step 4. Within this stage, the sum of net profit and depreciation expenses is divided by the value of the amount that is obtained from the addition of the market price of assets and long-term debt. As a result, we get the indicator that characterizes the total capitalization rate.
Step 5. Here is calculated the net profit before tax and the value of depreciation expense and interest.
Step 6. The obtained value in the previous calculation is divided into the combined rate, the indicator of which is determined on the basis of information from the enterprise database. In the absence of such, or in case of their insufficiency, an alternative method is used, by which the capitalization rate is determined. Real estate that brings profit to the enterprise, as a subject of calculation, is also not taken into account in this case. This alternative method is based on the procedure of sequential summation of indicators.
Step 7. Here, the value of the amount of net profit and depreciation is divided by the value of the total rate. The result is the full price of equity of the enterprise or company, taking into account the amount of borrowed funds.
It should be noted that in these calculations, it was assumed that long-term debt was accepted as part of equity. Naturally, in the calculation for the company being evaluated, it will be necessary to subtract the amount of long-term debt from the price of equity.