Total Assets vs Market Capitalization

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
“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
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.

Mutual Funds

The most prevalent and well-known type of mutual fund operates on an open-ended basis. This means that it continually issues (sells) shares on demand to new investors and existing shareholders who are buying. It redeems (buys back) shares from shareholders who are selling.

Mutual fund shares are bought and sold on the basis of a fund’s net asset value (NAV). Unlike a stock price, which changes constantly according to the forces of supply and demand, NAV is determined by the daily closing value of the underlying securities in a fund’s portfolio (total net assets) on a per share basis.

Net asset value (NAV) represents a fund’s per share market value. This is the price at which investors buy (“bid price”) fund shares from a fund company and sell them (“redemption price”) to a fund company. It is derived by dividing the total value of all the cash and securities in a fund’s portfolio, less any liabilities, by the number of shares outstanding. An NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio’s securities.

For example, if a fund has assets of $50 million and liabilities of $10 million, it would have a NAV of $40 million.

This number is important to investors, because it is from NAV that the price per unit of a fund is calculated. By dividing the NAV of a fund by the number of outstanding units, you are left with the price per unit. In our example, if the fund had 4 million shares outstanding, the price-per-share value would be $40 million divided by 4 million, which equals $10.

This pricing system for the trading of shares in a mutual fund differs significantly from that of common stock issued by a company listed on a stock exchange. In this instance, a company issues a finite number of shares through an initial public offering (IPO), and possibly subsequent additional offerings, which then trade in the secondary market. In this market, stock prices are set by market forces of supply and demand. The pricing system for stocks is based solely on market sentiment.

Because mutual funds distribute virtually all their income and realized capital gains to fund shareholders, a mutual fund’s NAV is relatively unimportant in gauging a fund’s performance, which is best judged by its total return.

Cost-benefit analysis

Cost-benefit analysis (CBA) is a method used to make business and economic-based decisions. CBA can be used to judge a single option, or compare two or more options to select the most optimal alternative.

CBA consists of estimating all the costs of a particular decision, then comparing them to the estimated benefits of that decision. CBA is not exclusive to business, as governments use it to evaluate different policy choices.

For instance, ABC, Inc. plans to build a new production facility. A CBA will consider the cost to build the new project against the benefits of added productivity from a modern plant. The CBA might also include other benefits such as an increase in employee morale.

IRR NPV and Discount Rate

IRR:

Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

One popular use of IRR is in comparing the profitability of establishing new operations with that of expanding old ones.For example, an energy company may use IRR in deciding whether to open a new power plant or to renovate and expand a previously existing one. While both projects are likely to add value to the company, it is likely that one will be the more logical decision as prescribed by IRR.Any project with an IRR that exceeds the RRR will likely be deemed a profitable one, although companies will not necessarily pursue a project on this basis alone. Rather, they will likely pursue projects with the highest difference between IRR and RRR, as chances are these will be the most profitable.
NPV :  Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project.

interesting reference:
http://www.mathsisfun.com/money/net-present-value.html

The following is the formula for calculating NPV:

Net Present Value (NPV)

where

Ct = net cash inflow during the period t

C= total initial investment costs

r = discount rate, and

t = number of time periods

A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

Discount Rate:
The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window. The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate. A third meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities.

Overall

A similar issue arises when using IRR to compare projects of different lengths. For example, a project of a short duration may have a high IRR, making it appear to be an excellent investment, but may also have a low NPV. Conversely, a longer project may have a low IRR, earning returns slowly and steadily, but may add a large amount of value to the company over time.