What is capitalisation: Types, Formula & Role in Valuation

Capitalisation means using your business’s income to find out how much your business is worth. It helps to know the real value of a company. Many companies use this method when they want to know how much money their brand name or goodwill is worth. In simple words, it is a way to turn your profits into the value of your business.

Rohan is a 29-year-old founder of a small fintech company in Bengaluru. In 2024, his business made a profit of ₹12 lakh after all expenses. He wanted to sell part of his company to an investor. His friend told him to use the capitalisation method to find the value of his company’s goodwill.

Rohan used a rate of 10%, as suggested by his financial expert. He divided ₹12 lakh by 10%, which gave him ₹1.2 crore. This meant the value of his company’s goodwill was ₹1.2 crore. The investor agreed. Rohan smiled and said, “Yeh toh badiya deal hai,” just like a hero in a Bollywood film. Using a simple formula helped him get a fair price for his hard work.

This blog will explain what capitalisation means in business, the types of capitalisation, simple formulas, steps, and how it is used in real life to value goodwill. 

Capitalisation in Business Valuation

In business, capitalisation means finding out how much a company is worth based on the money it earns. It helps us understand the value of a company using its income, profits, or expected future returns. 

For fintech companies, capitalisation shows how strong and trusted the business is. It also helps attract investors. When a business wants to raise money or sell itself, capitalisation helps decide the right price. 

It is also linked with something called goodwill, which is the extra value a company has because of its brand name, trust, and loyal customers. A company with high capitalisation often has strong goodwill and gives better returns on investment.

Let’s take an example. Neha, a 34-year-old founder of a fast-growing digital wallet company in Bangalore, wanted to bring in more investors in 2025. Her company had 50 lakh active users and made ₹20 crore in profit last year. Her team used capitalisation to show that the business was worth ₹180 crore based on its earnings and plans. This helped her company stand out in the market and prove its real value in numbers.

Smiling after her investor meeting, Neha said, “Main apni favourite hoon.” And why not? Capitalisation had helped her company shine.

Types of Capitalisation Method:

There are two main ways to find the value of a business using capitalisation. These are called the Average Profit Method and the Super Profit Method.

• In the Average Profit Method, we use the average profit the business earns every year. This method is good for businesses that make similar profits each year. It works well for companies that are steady and do not change much.
   
• The Super Profit Method is used when a business earns more profit than other similar businesses. This extra money is called "super profit." It is used mostly for fast-growing businesses or startups that are doing better than normal.

Here is a small table that shows the difference between the two methods:

Capitalisation of Average Profit vs Super Profit
 

Example: Aarav runs a peer-to-peer lending platform. His company makes a steady profit of ₹10 lakh every year. Other companies in the same field earn about the same, so he uses the Average Profit Method to find the business value.

But when Aarav launches a new product and starts making ₹15,00,000 profit, while others still make ₹10 lakh, he earns a super profit of ₹5 lakh. Now, he uses the Super Profit Method to find a new, higher value for his fast-growing business.

Read More – What Is Market Cap? Meaning, Types & How To Analyse Stocks?

Capitalisation of Average Profit Method

The Capitalisation of Average Profit Method is one way to find the value of a business. It tells us how much a business is worth based on its average yearly profit. This method is useful when someone wants to know the value of a company before selling, merging, or bringing in investors. It uses past profits to guess how much money the business can make in the future.

This method is simple. First, we find the average profit of the business over the past few years. Then, we divide that profit by the normal rate of return (the return that similar businesses earn). This gives us the value of the business.

How Riya Used Capitalisation of Average Profit to Value Her UPI App?

Riya owns a small UPI payment app. She wanted to find out how much her startup was worth before meeting investors. She checked her profits for the last three years. They were ₹12,00,000, ₹14,00,000, and ₹16,00,000. She took the average profit, which came out to ₹14,00,000.

The normal return rate for fintech apps like hers was 10%. So, she divided ₹14 lakh by 10%, which gave her a business value of ₹1.4 crore.

One of her friends joked, “Don’t underestimate the power of a common balance sheet!” Riya smiled, knowing numbers speak louder than words when it comes to investors.

Steps to Calculate Capitalisation of Average Profit
 

1. Find the profits for the last few years.
    
2. Calculate the average profit.
    
3. Find out the normal rate of return for similar businesses.
    
4. Divide the average profit by the normal rate of return.

Sample Calculation – Capitalisation of Average Profit:
 

Capitalisation Formulas:

Now that we have understood the super profit method, let’s quickly look at both main methods used in business valuation. Both use profit, but in different ways.

If your company earns a steady profit every year, use the Average Profit Method. But if your company earns more than average, and you want to show that value, use the Super Profit Method.

Capitalisation Formulas & When to Use:
 

These formulas are often used during investor pitches, especially in the fintech space. Investors want to know what a company is worth, both on paper and in terms of future earnings.

Also Read - Small Cap vs. Large Cap Mutual Funds in 2025: Where Should New Indian Investors Bet?

Role of Capitalisation in Business Valuation

Capitalisation helps show the true worth of a business. When investors want to put money in a company, they don’t just look at how much money it earns today. They look at how much it can earn in the future. That’s where capitalised profit becomes important.

Why Meera Used Capitalisation to Raise ₹5 Crores for Her Neobank?

Meera runs a neobank focused on women-led businesses. Her company didn’t earn big profits in the first two years. But by the third year, it started showing strong growth and better margins than most other fintechs. 

Using the Capitalisation of Super Profits Method, she showed a business value of ₹18 crores, even though the average profit was only ₹1 crore per year. This number impressed the investors, and she was able to raise ₹5 crores in her funding round. Without capitalisation, she would have had to settle for much less.

Conclusion

Capitalisation means knowing how much a business is worth by using its income or profit. In this blog, we learnt that capitalisation helps find out the real value of a company. It is useful for deciding the price of a business, calculating goodwill, or even asking for funds.

For fintech companies, capitalisation is very important. These companies often deal with investors, data, and fast-growing markets. If they understand capitalisation well, they can make better plans and attract more funding. It also helps them show their true financial strength.

If you run a fintech startup, try to keep your records clear and income steady. You can then use capitalisation to grow faster and make smart choices. Even small steps, like knowing your average profits and expected return rates, can help you a lot. Just like you cannot build a house without knowing the size of the land, you cannot build a strong business without knowing its value.

FAQs

1. What is capitalisation in simple terms?
Capitalisation means finding out how much a business is worth using its profit.

2. Which capitalisation method suits fintech startups best?
The super profit method is good for fintech startups. 

3. How is goodwill calculated using this method?
Goodwill is the extra value of a business beyond its assets. 

4. What are super profits?
Super profits are profits made by a business that are more than what a normal company earns. 

5. Can capitalisation be used for investor funding?
Yes, capitalisation helps when asking investors for money.