Forum Archive Index - June 2003

[nickk@quicksilver.net.nz]

My god.............Johnny Wilkinson on sharechat! 

John H T Wilkinson writes: 

> Gav - The definition you offer for "Book Value", in your Basic Summary, is 
>what is known as the "Net Realisable Value". 
> 
> "Book Value" is the figure that an asset is recorded at in an entity's 
>financial records. 
> 
> In the case of a depreciable asset, e.g. a Motor Car, it will be it's 
>original cost less accumulated depreciation.
> Original Cost will exclude GST if the entity is GST Registered and it's 
>Accounting Policy is to prepare Financial Statements on a GST exclusive basis 
>(which most do).
> "Depreciation" is an amount claimed against revenue so as to spread the cost 
>of a depreciable asset over its useful life.
> The amount claimed for Depreciation may or may not result in a "Book Value" 
>that exactly reflects the 'Net Market Value" of an Asset.
> Financial Statements for "Normal" reporting  purposes are prepared on a going 
>Concern Basis using the Book Value of depreciated assets. 
> 
> In the case of non-depreciable assets, e.g. Debtors, Inventory, the valuation 
>of those assets will be considered at balance date and any write downs, but 
>not write ups, deemed prudent will be made to reduce their book values. 
> 
> So - Book Value = What's in the Books, and not necessarily Market Value 
> 
> Market Value is another exercise and is what those "Due Diligence" guys get 
>up to.  
> 
> JHTW
>   ----- Original Message ----- 
>   From: Gavin Treadgold 
>   To: sharechat@sharechat.co.nz 
>   Sent: Thursday, June 19, 2003 3:42 PM
>   Subject: RE: [sharechat] book value 
> 
> 
>   Hi All. 
> 
>   > -----Original Message-----
>   > Book value is the the accounting value of assets.  For example you buy a
>   > nice Mercedes, you have an asset.  But the book value of the
>   > asset decreases over time as deprecation sets in. 
> 
>   This is true for the book value of an individual asset, but from an
>   investment perspective I believe that to calculate the total book value of a
>   company you must offset any liabilities against the assets to generate the
>   book value. Perhaps a good indicator of the book value of a company is how
>   much cash would be generated if the whole company was liquidated and sold.
>   Before distributing the cash, all the debts must be paid off and then the
>   remainder is paid out - this final amount for payment is what I would call
>   the book value. 
> 
>   Book value is pretty much a snapshot of the current point in time, it does
>   not take into account future earnings. 
> 
>   Market capitalisation, the markets value of the company, on the other hand
>   is a speculative value of the current book value _plus_ future earning
>   potential. If a company is expected to generate good growth (and hence
>   earnings) in the future, then investors are prepared to pay a premium for
>   the future earnings and the market cap will be greater than the book value
>   of the company. As market cap is number of shares * share price, the Price
>   to Earnings ratio (P/E) is one indicator of the current premium that the
>   market has on future earnings for the company. The higher the P/E, the more
>   growth in earnings is expected by the market and the higher premium an
>   investor will pay for partial ownership of the company. 
> 
>   I guess a basic summary is: -
>    * book value is how much cash would be generated if all the assets were
>   sold for a fair price and outstanding debts being paid off
>    * market value is the markets current valuation of the business, which
>   incorporates both book value, and speculation on future earning potential. 
> 
>   Hope this helps! 
> 
>   Cheers Gav 
> 
> 
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