Forum Archive Index - June 2003

["Allan Potts" <ajp7079@excite.com>]

Dear Gav,

Your definition of book value is actually liquidation value.  I believe book 
value is more aligned to the accounting scenario mentioned earlier.

In an earlier post it was suggested that companies always sell for less than 
book value.  This may be generally true in NZ, but in the U.S. shares 
frequently trade much higher than book, or accounting value.

Allan (back from the raging seas) 




 --- On Wed 06/18, Gavin Treadgold  gav@rediguana.co.nz  wrote:
From: Gavin Treadgold [mailto: gav@rediguana.co.nz]
To: sharechat@sharechat.co.nz
Date: Thu, 19 Jun 2003 15:42:17 +1200
Subject: RE: [sharechat] book value

Hi All.<br><br> -----Original Message-----<br> Book value is the the accounting 
value of assets.  For example you buy a<br> nice Mercedes, you have an asset.  
But the book value of the<br> asset decreases over time as deprecation sets 
in.<br><br>This is true for the book value of an individual asset, but from 
an<br>investment perspective I believe that to calculate the total book value 
of a<br>company you must offset any liabilities against the assets to generate 
the<br>book value. Perhaps a good indicator of the book value of a company is 
how<br>much cash would be generated if the whole company was liquidated and 
sold.<br>Before distributing the cash, all the debts must be paid off and then 
the<br>remainder is paid out - this final amount for payment is what I would 
call<br>the book value.<br><br>Book value is pretty much a snapshot of the 
current point in time, it does<br>not take into account future 
earnings.<br><br>Market capitalisation, the markets value of the company, 
 on the other hand<br>is a speculative value of the current book value _plus_ 
future earning<br>potential. If a company is expected to generate good growth 
(and hence<br>earnings) in the future, then investors are prepared to pay a 
premium for<br>the future earnings and the market cap will be greater than the 
book value<br>of the company. As market cap is number of shares * share price, 
the Price<br>to Earnings ratio (P/E) is one indicator of the current premium 
that the<br>market has on future earnings for the company. The higher the P/E, 
the more<br>growth in earnings is expected by the market and the higher premium 
an<br>investor will pay for partial ownership of the company.<br><br>I guess a 
basic summary is: -<br> * book value is how much cash would be generated if all 
the assets were<br>sold for a fair price and outstanding debts being paid 
off<br> * market value is the markets current valuation of the business, 
which<br>incorporates both book value, and speculation on 
 future earning potential.<br><br>Hope this helps!<br><br>Cheers 
Gav<br><br><br>----------------------------------------------------------------------------<br>To
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