A Tale of Two Figures
Two weeks ago I wrote a post discussing book value and how investors could use the metric. The great discussion that ensued, both in the comments and in the realms of my fellow bloggers, highlighted quite nicely how even the basic building blocks of investment analysis can be interpreted in so many different ways. That’s the reason that it’s far from uncommon to read a shockingly bearish report, and agree entirely – but then to wander across to the territory of those who hold the stock, and find equally plausible reasons for the share price to double. Usually immediately. Shareholders are usually filled with the conviction that it should go up fast!
There is one point in that post, though, that I’d like to talk about a little further:
On the other hand, some of the companies my portfolio owns don’t have particularly impressive book values – that is to say, I paid more for the company than I actually received in tangible assets. In this case, then, it may appear that I’m throwing money down the drain. What gives? Well, here I’ll attempt to highlight two main ways I think about book values and how they help my analysis of a company.
This is clearly true. Not all the companies in my portfolio are trading at discounts to tangible book value – in fact, far from it. There’s one company – Creston- that stands out in particular, though, as not only does it not trade at a discount to tangible book value, it trades at a negative tangible book value. The difference between these lies in the deduction of liabilities. A company with £100m of property and £50m of debt will have a positive book value – but the magnitude of that price to book value , from 0 to infinity, is decided by the market. But the market, no matter how highly it prices the company, cannot make a company trade at a negative PTBV – that requires total liabilities exceeding total tangible assets. Given my previous stance, then, it may sound like these companies are my worst nightmare; where is the ‘margin of safety’ I cherish? As always, there’s more than one way of looking at it!