As already mentioned above, market cap is a metric that measures the size of a company by multiplying its outstanding shares by the price per share. It is important to make the distinction between market cap and the equity on a company’s balance sheet, which are different terms. 

Market Cap = Current Stock Price × Total Outstanding Shares. 

Market capitalization shows a few key things about a company, such as:

• Size - Market cap is a measure of a company's size in terms of its total market value. It reflects how much investors are willing to pay for the company's ownership through its stock
• Relative importance - Market cap helps categorize companies into different groups based on their size. These groups typically include large, mid, small, micro, and nano cap stocks
• Investor interest - Market cap can also give an indication of the level of interest from investors. Larger companies with higher market caps often attract more attention from institutional investors and analysts

Using Market Cap To Value Companies

Market cap is also a vital tool in determining the actual value of a company. The stock market can be full of wild swings in either direction, which can lead to stocks being overbought or oversold in accordance with investor sentiments. This can blur the realistic market value of a company as a whole, which is why many analysts use the metric as a comparison benchmark in their calculations. 

There are several ways of using market cap in stock valuation, such as:

• Comparative analysis - Market cap is often used for comparative analysis. Investors and analysts compare the market caps of different companies within the same industry or sector to gain insights into their relative sizes and positions
• Index inclusion - Many stock market indices, such as the S&P 500 or the NASDAQ-100, are composed of companies selected based on their market cap. Companies with larger market caps are more likely to be included in these indices, and their performance can affect the overall index's performance
• Valuation metrics - Market cap is used in conjunction with other valuation metrics like price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, and price-to-book (P/B) ratio to assess whether a stock is overvalued or undervalued relative to its peers or historical averages
• Acquisitions and mergers - In the context of mergers and acquisitions, market cap plays a role in determining the potential purchase price of a company. Acquirers often pay a premium over the target company's current market cap to gain control

While market cap might not be an accurate depiction of the true size of a company, it is nonetheless a vital metric when it comes to assessing enterprise value and balancing a stock portfolio. 

• Market cap is a metric that measures the relative size of a company that trades its shares on an exchange
• Companies differ greatly in terms of their market capitalization 
• Market caps are useful metrics to determine the real book value of a company and is also often used in comparative analysis
• The market cap of a company is also pivotal in determining its acquisition price in the case of another entity buying out its shares from the market