Forum Archive Index - June 2003

["Gavin Treadgold" <gav@rediguana.co.nz>]

Hi Allan.

I agree, but as an investor, I am not concerned about the accounting book
value (asset register/one book) of a desk here, building there, and so on. I
am however concerned about the overall value of the assets and liabilities
(all the books). If everything turns bad, how much is it worth.

If I purchase a company, I also take on the debts of that company. Hence I
cannot just look at the assets, but also the liabilities.

Of course, even this form of valuation has its downside. The liquidation
value of a company is solely the cost of the individual components. It does
not place any value on combinations of these components.

Perhaps another way of comparing my 'liquidation value' and the market value
is this.

Liquidation value - cash received from the sale of individual components of
the business, less outstanding debts. This form of value does not account
for synergy created by combining these components. This value is however at
the objective end of the valuation spectrum.

Market value - this not only values the individual assets that make up a
business, but also values the combinations of these assets. However because
combinations are somewhat intangible, and assets can be regrouped and
reorganised to do different things, this value is very subjective and
fickle - as represented by day-to-day flucuations on the share market. This
value is much more subjective, as everyone has a different view of the value
of the components.

A simple example. You have a calculator, pad, pencil and an accountant.
Liquidation value is how much so can sell them for individually, less any
outstanding debts on your business. Market value would be the liquidation
value, plus a premium for the fact that an accountant can use a pad, pencil
and calculator to generate income. The subjectivity comes in when you try
and value this combination of components, and estimate future earnings from
this combination.

Coming back to your point about companies selling for less than 'book value'
in NZ, that makes perfect sense. Given that most companies will have some
form of debt, it would be foolish to purchase a company based solely on the
value of the companies assets or its 'book value'. One must also take into
account the debt which is not represented in the 'book value'.

John's email has just come in and he has laid out the terminology nicely. I
think this thread highlights the ambiguity that lies in the term 'books' and
its use, and that more specific terms (as mentioned by John) need to be
used. I am now at fault for not having used the correct terms! :)

My assumption in the original email was that books meant Net Realisable
Value as this was an investing list. Had this been an accounting list then I
would have taken book value to be the asset register.

Cheers Gav


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