The common stock ratio is a valuable calculation that helps to illustrate the relationship of a company’s common stock to the overall capitalization of the business. Essentially, the common stock ratio is determined by dividing the total capitalization of the company into the current value of the common stock currently in issue. The ratio is usually presented as a percentage.
In order to understand the underlying factors that go into determining the common stock ratio, it is necessary to define what is meant by overall capitalization. In simple terms, capitalization within this context is the sum of total outstanding shares currently in issue that is multiplied by the current price per share. Once this figure is determined, it is possible to relate the figure to the common stock and have an accurate picture of how well the stock is performing.
In many instances, other factors are also taken into account before dividing by the total capitalization. Many analysts choose to add together the amount of common stock, retained earnings, and any paid-in surplus that is accrued before attempting to relate the overall value of the common stock to the current overall capitalization. This approach is considered to be a more holistic approach to assessing the performance level of the stock, and thus providing a more accurate picture of the financial condition of the company.
The calculation of the common stock ratio is helpful to a company for a few reasons. First, understanding the current common stock ratio and the elements that go into the calculation can help analysts identify changes in factors that are causing either a decrease or increase in the ratio. Second, isolating the factors that are making a change in the common stock ratio from one period to the next can help the company to either make adjustments to minimize the decrease or maximize the increase, given the current trends in the market. Last, a shift in the common stock ratio may serve as an indicator in changes within the market that are not avoidable, but can be weathered with proper preparation.