Daniel, I know of no easy way to answer that question, and many of the implications that go with it are indeed troubling. One very important ancillary problem is that balance sheet values are inextricably entwined with management estimates-- an these can lead to very nasty surprises for the unwary. For example, there was a computer leasing company in the 70's (the name escapes me now) that was extremely profitable for a number of years, until IBM came out with its next generation of mainframes. The problem was that management chose to depreciate the assets (mainframes) over an unreasonably long period of time and assigned unreasonably high salvage values to the hardware. This means that the assets values were substantially overstated on the books. As I recall, the company filed for bankruptcy about six months after the new generation of computers was unveiled, and was subsequently liquidated .The only way you would know these practices is if you had detailed knowledge of the computer business, and knowledge of the product life cycle.
The other issue I find troubling in a balance sheet approach is that even if the value of the asset really is significantly understated we need to figure out what chain of events would lead to unlocking that value. For example, a railroad may own land carried on the books at only a few dollars an acre, but is currently worth $100,000 per acre. This land may be a right of way, so what unlocks this hidden "value" to the investor? Probably only the demise of the business.
That's why I think that a cash flow approach may be a better first step in valuing a business then looking at book value.
Regards,
Paul |
