Forum Archive Index - June 2003

["John Ascroft" <jascroft@jadeworld.com>]

Carl,

Book value (NTA in this case) is a measure of the value of assets employed
by the enterprise. It says nothing about the income streams being generated.

When a shares market value is assessed investors are essentially buying the
future income stream, they don't care so much about the value of assets
employed.

Imagine a scenario where two companies had identical asset bases, but one
had made increasing profits year on year and the other was losing money each
year.

P/E ratio is a more useful indicator of how reasonable a market value is. In
this case we look at the market value expressed in terms of how many years
earnings it represents. In other words we are comparing the market price
with the earnings, rather than the assets.

Another reason why NTA is not a reliable indicator is that asset valuation
is a huge area and can be quite contentious. Look at Fletcher Forests for
example. It has huge assets in the forests it owns, but their valuation is a
matter of directors judgement until they are actually sold when we know what
the 'correct' value was. Some companies, in the property sector for example,
generate more 'profit' by revaluing their assets upwards, than they actually
earn in real money. In other cases, a company will write off huge chunks of
money when they suddenly decide an asset they had valued higher needed to be
reduced. All of this makes NTA a relatively subjective number compared with
earnings, dividends and cash flow which are generally firmer.

Hope this helps.

John

Ps. I think it is better to have this sort of 'kindergarten' discussion to
help new investors and students, than to sit through pages of old war
stories about Chase etc, but everyone is entitled to their own opinion I
guess.


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