Market Capitalization vs. Total Assets
Total assets and market capitalization both help you evaluate a company, but they tell you different things about it. One is a measure of company size and reach -- how much "stuff" the company has. The other is a measure of value, as determined by the market -- that is, how much the company is actually worth.
"Total assets" represents the combined value of all assets owned by a company. You can find this number on the company's balance sheet. An asset is anything that can provide future economic benefit and whose value can be measured reliably and objectively. Cash in a company's bank account is an asset, of course, as are items in its inventory; its accounts receivable (that is, its IOUs from customers); stocks and other securities; and land, buildings, vehicles and equipment. Companies have intangible assets, too, such as patents, trademarks, brand names and other intellectual property. Some of these appear on the balance sheet and are included in total assets, while others don't appear and aren't included.
What Total Assets Tell You
Total assets can give you a sense of the "size" of a company, but this measurement doesn't tell the whole story. Many companies have substantial intangible assets that don't appear on their balance sheets because there's no objective way to measure their value. One famous example is Mickey Mouse. The trademark for Mickey is worth billions of dollars to The Walt Disney Co., but since the character was developed inside the company, its value can't be reliably established under standard accounting rules. If Disney sold the trademark, though, that would establish an objective value. Total assets also don't take into account a company's liabilities -- its debts and other financial obligations. A company with $50 billion in total assets and $30 billion in liabilities is likely in fine shape; one with $50 billion in total assets and $80 billion in liabilities may be on the brink of bankruptcy. Finally, total assets don't tell you how efficiently a company is using its assets to generate revenue or profits. Businesses and financial analysts look to ratios such as asset turnover (sales divided by total assets) to gauge efficiency.
Market capitalization is the total value of all of a company's outstanding stock. You calculate it by multiplying the current stock price by the number of shares owned by stockholders. So, if the price is $50.45 per share and the company has 100 million shares outstanding, the company's "market cap" is $5.45 billion. Any publicly held company's market cap is readily available on financial websites.
What Market Cap Tells You
In essence, market capitalization is the stock market's overall assessment of the value of a company. Almost invariably, a company's market cap will be different from its "net assets" -- the value of its assets minus its liabilities. Since market cap is directly related to the stock price, it takes into account things that don't appear anywhere on the balance sheet -- not only unlisted intangible assets like Mickey Mouse, but also management expertise, growth prospects, market share, the company's reputation and the psychology of the market itself. A company's market cap can soar or plummet based on perceptions completely unrelated to its performance. A whole "school" of investors, called value investors, make their money by identifying and buying into companies whose market cap is lower than their net assets indicate it should be.
- "Financial Accounting for MBAs," Fourth Edition; Peter Easton, et al; 2010
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.