How to Calculate Assets to a Market Cap Ratio
Original post by Victoria Duff of Demand Media
There are many kinds of assets to be found on a company's balance sheet. Total assets includes current assets plus plant and equipment, intellectual property and whatever else a company can consider an asset, such as goodwill. While it may be interesting to see how much total asset value backs up the market capitalization of a company, using only net current assets to figure the ratio of assets to market cap will give you a better idea of the company's current financial strength. After all, it takes a long time to sell of plant and equipment, long-term loans may not get paid and goodwill is hard to turn into cash.
Calculate the market capitalization of the company by multiplying the current stock price by the number of issued and outstanding shares. You can find this information by calling the transfer agent, if you require absolute accuracy, or it is available in the latest 10-Q quarterly report published in the SEC's EDGAR database. It is also often available on the company's website or in stock quote information from your broker.
Calculate the company's assets by taking the figures for current assets and subtracting current liabilities, which gives you the amount of money the company has available for operations, called working capital. Current assets normally include cash, cash equivalents, short-term investments, inventory and accounts receivable. Current liabilities include accounts payable, notes payable and accrued expenses.
Divide the net current assets or working capital by the market capitalization to find out how much working capital per share the company has. This is a good indicator of the company's financial strength.
Tips & Warnings
- Take inventories, accounts payable, short-term investments and anything else that is not cash and cash equivalents out of your net current assets figure. This might be a good indication of a potential take-over candidate. If the company is accumulating cash, perhaps it is thinking about acquisitions, itself. Otherwise, if the ratio of cash to market cap is high, the company is probably not efficiently using its money to grow the company.
- Quick MBA: Security Analysis
- Morningstar: Asset Size and Market Cap
- Zacks Investment Research: Size Matters -- Market Capitalization
- UCLA Anderson School of Business: How to Read a Balance Sheet
About the Author
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.