SemiBear, you seem to be focused on the balancesheet in your valuation.
Put it this way, T-Bill's have no assets behind them, they simply represent the a debit the gov't has incured and has promissed to pay, with interest over a period with a defined redemption date.
How do you value on a 10 or 30 year T-bill?
In a pure sense with DCF analysis, with some premium/discount(market sets) relative to short term "risk free" investments.
The risk premium/discount for the G bond isn't based upon concern about the viability of the backer to exist and pay back (a least currently), rather it is a difference developed in the market based on percived potential change in relative value of the CF stream. In the early 80's when short term rates were higher than t-bills, market anticipated rates to come down. Recently with short term rates below long bond market the bias was for rates to increase.
None of this involves balance sheet.
Balance sheet has a purpose of explaining a firms capital structure, where the $ came from and what the $ is used for.
Sure its part of valuation but not the way you use it, rather to make reasonable inference about cash flow as a investment is made with the purpose of the investor getting his cash back plus some.
Don't they have to eventually write off what's above the value of the brand or IP? It seems to me, PG is saying the value of their brands is 13 Billion. Take that away, and all you get is a 2 percent dividend. So PG is selling for 10 times brand value
Yes goodwill is written down, but over a prolonged period, in private companies the objective is to write down fast, in many publics the object is to show good profit (write down slow), however cash flow analysis eliminates all the bull shit such as MINI discussed here a while back (give me a bunch of dough and I'll give you a paltery return back, but as long as the amount I'm giving back is growing it must be a good deal....pyrmide scheme, just like the tech bubble built on capital infusion...... capital inflow stops, house of card collapses.
Here's a article discussing this very subject;
m2
thisismoney.com
WPP profits bent the rules
Jon Rees, Mail on Sunday 21 July 2002
DVERTISING giant WPP is boosting profits by hundreds of millions of pounds a year using a controversial accounting method that it admits bends the rules.
Today's City News
• WPP profits bent the rules
• State pensions in the firing line
• Market report: Friday close
• Wall Street report: Friday close
• Back to 70s for big-spending Brown
• Abbey turns to the headhunters
WPP, which owns J. Walter Thompson, Ogilvy & Mather and Young & Rubicam, is the world's biggest marketing services group. Its accounts for last year, signed off by disgraced accountancy group Andersen on 9 May, showed a pre-tax profit of £411m.
But analysis by accountancy firm Willott Kingston Smith, which specialises in marketing services, shows the profit would have been just £96.9m if more conservative book-keeping practices on takeovers had been adopted. A similar situation happened in 2000, according to WKS.
Companies must account for the depreciation of 'goodwill' in the businesses they buy over a fixed period, usually 20 years, to give a true and fair view of their accounts. Goodwill is the difference between the value of its assets and the price paid because of, say, the reputation of a brand name.
But WPP did not do this with certain key acquired businesses. Instead, it put a value of £950m on its balance sheet for its major advertising agency takeovers. WPP's annual report for 2001 says that it considers them to have an 'infinite economic life' because they are big names that are likely to continue performing well. It treats the £3bn acquisition of Young & Rubicam in 2000 and the £950m purchase of media buying agency Tempus a year later in the same way.
By failing to recognise depreciation of goodwill in this way, WPP can boost profits that would otherwise reflect the declining value of these businesses.
UK company accounts are audited to show that they give a 'true and fair' view of financial health, but WPP's technique is known as a 'true and fair override'. There is no suggestion that it is acting illegally.
But WPP says in its annual report that the ' financial statements depart from the specific requirement of companies legislation to amortise* goodwill over a finite period in order to give a true and fair view'.
WPP said: 'The value of advertising agencies lies primarily in their clients and the staff who attract those clients rather than tangible assets such as buildings or land.'
Fears over the accuracy of company accounts have hammered stocks on both sides of the Atlantic. Andersen was auditor to two of the higher-profile scandals: US energy trader Enron, and US telco WorldCom, which recently disclosed book-keeping irregularities of nearly $4bn.
Since Andersen's demise, WPP has appointed Deloitte & Touche as its auditor. |
