points to note when valuing the assets
The reliability of the information and the strategic situation of both firms and industry usually influence the judgment when valuing an asset. Balance sheet is one example for illustrating the influence of the info reliability. Investors need to design how far down the balance sheet they need to go. Benjamin Graham considered only current assets in his valuation. Current assets valuation is accurate based on either liquidation or reproduction cost approach. For the strategic situation part, the investors need to think if the industry is viable. The asset value estimate is based on what they will bring in liquidation. But if they have no market, they can only be sold for scrap. So if the asset value is based on reproduction cost or liquidation approach, the investor need to look for an industry that is either stable or growing.
There are several things worth noting here.
- The more commodity-like the inventory, the less the discount necessary to sell it. While the discount will be higher for highly specialized inventory. If object & technical knowledge is required, please consult the expert appraiser.
- If LIFO is used and item price is soaring, the reproduction cost of the inventory is higher than the published figures.
- PPE is usually the larges non-current assets for most companies.
- If Land market value is lower than the land reproduction cost, the additional cash or the higher market price of the land certainly adds to the asset value of that particular company. This situation is just similar to the companies with a lot of cash to run their business.
- The disparity between the book value and reproduction cost of the plant can be potentially enormous for two reasons:
- The depreciation rules by which the company reduces the plant value may bear only the slightest resemblance to what is happening to the asset economic value.
- The depreciation we change ourselves to replace this year’s use of the asset economic value is based on historical cost. On other hand, our potential competitors have to pay for the asset in today’s dollars. Their cost should reflect this increase.
The points to note I mentioned above are only some that I found very interesting. The book has also discussed other points such as the goodwill value and the method for assigning a value to the license or franchise. If readers are interested, please feel free to check them out.
Reference:
Greenwald. B. C. N. & Kiviat. B. (2001). Value Investing: From Graham to Buffett and Beyond. Wiley.
