Question on book value per share

[RandomInvestor]

I am reading this book called "the little book of value investing" and it talks about Graham how he made the BVPS formula. And can tell you whether or not a company is undervalued, but I can't see how this makes sense? Bvps is simply total equity divided by shares outstanding what does this have to do whether or not the company is undervalued? It's not looking at the company from an earnings perspective or an asset perspective but an equity perspective by the looks of it?

The other thing as I am studying A2milk, this year its book value was 0.18 what does this mean? What do I do with this information?

It says if a stock is below its book value. Is it referring to the market price? So does that mean A2milk is potentially overpriced because its market price is higher than its bvps? What exactly is going on here?

 

[luutzu]

I am reading this book called "the little book of value investing" and it talks about Graham how he made the BVPS formula. And can tell you whether or not a company is undervalued, but I can't see how this makes sense? Bvps is simply total equity divided by shares outstanding what does this have to do whether or not the company is undervalued? It's not looking at the company from an earnings perspective or an asset perspective but an equity perspective by the looks of it?

The other thing as I am studying A2milk, this year its book value was 0.18 what does this mean? What do I do with this information?

It says if a stock is below its book value. Is it referring to the market price? So does that mean A2milk is potentially overpriced because its market price is higher than its bvps? What exactly is going on here?

Graham's book value is not simply the equity. The equity value you're thinking about is just the equity.
There's also the Net Tangible Asset, which, from a very tired memory today, is taking out the intangibles in the assets. Things like brand name, IP, goodwill.

Basic accounting equation is: Asset = Liability + Equity.

Equity is the cash that's put into the business. Liability are the debts and liabilities.

Since the equity cash could be use to buy practically anything... it's that that might mean what was bought might not be worth what was paid for. Could have gone higher, could have gone lower in value. But it's on the books so that's the asset, balancing it with the equity part of the RHS.

While assets can be a bunch of IPs, useless goods only their mother would buy... liabilities are often real. Might even be understated, but let's assume we're all honest so take it as is, liability is what needs to be paid.

See the issue now? If you use equity as the "book value", the assets might not be worth as much as the company think it does... so if there's a fire sale, how much less would it be?

So you can't really use equity as a measure for that. Another reason you can't really use it at that high (total equity) level is that equity consists of a few subgroup... contributed equity [cash raised from shareholders], retained earnings [profits they kept back] or accumulated losses, reserves, minority interests etc.

If there's too much accumulated losses, what good is that equity? Won't last too much longer.
--------------

As to Graham's definition of "book value"... he recommend investors to make certain adjustments to the assets. Such as not taking inventories as it is written, adjust it down to something like 10% - that's the amount you're likely to get if there's a firesale; adjust certain buildings, plants and equipment; kept the cash as is etc. etc.

A bargain would be when the share price is asking for a whole lot lower than this. Though from memory Graham define a no-brainer bargain as when share price is below the net working capital.

Why do you need this?

Because, as he points out in one of his essays... [at least that's where I read it from]... that too often the market just priced a company down to practically nothing when its earnings disappoint them for a while. That the market focuses too much on earnings and not enough on the asset value.

For certain companies, their assets are very real. Have real value even though it's not earning as much lately for some reason.

That and don't be fooled by earnings and its growth alone. An investor need to look at the company's assets, its book value, look into how much money has been invested into it to put the company's earnings and growth into some sort of perspective. That is, I have $5, found $1 and that's be earning an extra 20%. I still have only $6 to my name even though the margin and growth rate was very impressive.


Here's a good example of a company I bought into based on its assets value alone. See how DangInvestor does all the hard work for you?



MMA Offshore valuation:

for 2015 and 2016... see how value based on its earnings goes negative?
How do you value a company with negative earning? Negative value.

Kinda stupid but I have actually read some analysts putting a negative value on a company before. And he wasn't referring to book value valuation either. THough I honestly don't think a company could ever have negative value... its lowest would be zero because going below that and the limited liability kicks in.

Anyway, when earnings have been bad, the market tend to don't know what to do... because their calculator doesn't cater for it or something.

Now look at the greyish line in the chart. That's the Graham's adjusted book value (adjustment based on his recommended reductions, you'd need to do further adjustments yourself if this default adjustment looks interesting enough].

BVPS was $1.70. Market price at some $.40 when I first bought in, now it's a lot lower than that. But that's averaging down is for... hide your mistakes at marketing timing and future gazing

Note the orange area chart where I estimate it's worth between $1 to $2.40 a share? It's the really long-term thinking and not a mistake Ey, it was in a much better condition when I did that.


And here MAYNE PHARMA VALUATION

Too much focus by the market on earnings and growth. There's not much earning growth, just sales growth through debt and capital raising binge for acquisition. The earnings from those barely register.

All that hundreds of millions raised gives them tangibles assets with the company worth about $0.04 a share following Graham's adjusted valuation.

Not going to end well. Maybe it will chuck along if enough people believe in it I guess.

 

[skc]

I am reading this book called "the little book of value investing" and it talks about Graham how he made the BVPS formula. And can tell you whether or not a company is undervalued, but I can't see how this makes sense? Bvps is simply total equity divided by shares outstanding what does this have to do whether or not the company is undervalued? It's not looking at the company from an earnings perspective or an asset perspective but an equity perspective by the looks of it?

The other thing as I am studying A2milk, this year its book value was 0.18 what does this mean? What do I do with this information?

It says if a stock is below its book value. Is it referring to the market price? So does that mean A2milk is potentially overpriced because its market price is higher than its bvps? What exactly is going on here?

Accounting 101. Owners Equity = Assets - Liability *. Owners Equity also goes by several other names like equity or book value etc.

So in the simplest term... a company holds $100m cash with no debt, it has equity value of $100m. If this company has 50m shares on issue, it is worth $2 per share. If the market value is trading at $1.50 per share, then you can make a case that it is undervalued. MGX is one such example on the market. But if it for some reason trades at $4 per share, then you can argue that it is overvalued.

However nothing is so straight forward and simple. The numbers on the balance sheet are just accounting expressions. Assets value can be greatly different in real life. It may be significantly less (see any writedown announcements e.g. by Slater and Gordon) or significantly more (like a software company or professional service business with little hard assets other than people and intellect). Graham's formula will be useful only in specific circumstances and must be sense checked. The BVPS method can also give false positives. Take a look at the last few announcements by RNY... and see how asset valuations can be dead wrong.

With A2M... earning clearly matters and is the basis of its valuation. Remember a company's valuation is the present value of future cashflows... and future cashflows include a combination of earnings and assets (when they are sold). A company may generate lots of earnings with very little assets (like a group of accountants who's only assets are computers and office furniture), and has a lot of value, but the BVPS method will in this instance indicate that the company is over valued. So the question to ask is... Does it really matter that A2M is able to generate such earnings with just $0.18 per share of asset?

* Indeed the correct expression is Assets = Liability + Owners Equity. The way to remember this is simply that, the left hand side shows what the company owns, the right hand side shows how these assets are funded.

 

[RandomInvestor]

Graham's book value is not simply the equity. The equity value you're thinking about is just the equity.
There's also the Net Tangible Asset, which, from a very tired memory today, is taking out the intangibles in the assets. Things like brand name, IP, goodwill.

Basic accounting equation is: Asset = Liability + Equity.

Equity is the cash that's put into the business. Liability are the debts and liabilities.

Since the equity cash could be use to buy practically anything... it's that that might mean what was bought might not be worth what was paid for. Could have gone higher, could have gone lower in value. But it's on the books so that's the asset, balancing it with the equity part of the RHS.

While assets can be a bunch of IPs, useless goods only their mother would buy... liabilities are often real. Might even be understated, but let's assume we're all honest so take it as is, liability is what needs to be paid.

See the issue now? If you use equity as the "book value", the assets might not be worth as much as the company think it does... so if there's a fire sale, how much less would it be?

So you can't really use equity as a measure for that. Another reason you can't really use it at that high (total equity) level is that equity consists of a few subgroup... contributed equity [cash raised from shareholders], retained earnings [profits they kept back] or accumulated losses, reserves, minority interests etc.

If there's too much accumulated losses, what good is that equity? Won't last too much longer.
--------------

As to Graham's definition of "book value"... he recommend investors to make certain adjustments to the assets. Such as not taking inventories as it is written, adjust it down to something like 10% - that's the amount you're likely to get if there's a firesale; adjust certain buildings, plants and equipment; kept the cash as is etc. etc.

A bargain would be when the share price is asking for a whole lot lower than this. Though from memory Graham define a no-brainer bargain as when share price is below the net working capital.

Why do you need this?

Because, as he points out in one of his essays... [at least that's where I read it from]... that too often the market just priced a company down to practically nothing when its earnings disappoint them for a while. That the market focuses too much on earnings and not enough on the asset value.

For certain companies, their assets are very real. Have real value even though it's not earning as much lately for some reason.

That and don't be fooled by earnings and its growth alone. An investor need to look at the company's assets, its book value, look into how much money has been invested into it to put the company's earnings and growth into some sort of perspective. That is, I have $5, found $1 and that's be earning an extra 20%. I still have only $6 to my name even though the margin and growth rate was very impressive.


Here's a good example of a company I bought into based on its assets value alone. See how DangInvestor does all the hard work for you?

View attachment 71908

MMA Offshore valuation:

for 2015 and 2016... see how value based on its earnings goes negative?
How do you value a company with negative earning? Negative value.

Kinda stupid but I have actually read some analysts putting a negative value on a company before. And he wasn't referring to book value valuation either. THough I honestly don't think a company could ever have negative value... its lowest would be zero because going below that and the limited liability kicks in.

Anyway, when earnings have been bad, the market tend to don't know what to do... because their calculator doesn't cater for it or something.

Now look at the greyish line in the chart. That's the Graham's adjusted book value (adjustment based on his recommended reductions, you'd need to do further adjustments yourself if this default adjustment looks interesting enough].

BVPS was $1.70. Market price at some $.40 when I first bought in, now it's a lot lower than that. But that's averaging down is for... hide your mistakes at marketing timing and future gazing

Note the orange area chart where I estimate it's worth between $1 to $2.40 a share? It's the really long-term thinking and not a mistake Ey, it was in a much better condition when I did that.


And here MAYNE PHARMA VALUATION

Too much focus by the market on earnings and growth. There's not much earning growth, just sales growth through debt and capital raising binge for acquisition. The earnings from those barely register.

All that hundreds of millions raised gives them tangibles assets with the company worth about $0.04 a share following Graham's adjusted valuation.

Not going to end well. Maybe it will chuck along if enough people believe in it I guess.

View attachment 71909

Thanks lutzuu for the great chunk of info but I think you confused me even more

 

[RandomInvestor]

Accounting 101. Owners Equity = Assets - Liability *. Owners Equity also goes by several other names like equity or book value etc.

So in the simplest term... a company holds $100m cash with no debt, it has equity value of $100m. If this company has 50m shares on issue, it is worth $2 per share. If the market value is trading at $1.50 per share, then you can make a case that it is undervalued. MGX is one such example on the market. But if it for some reason trades at $4 per share, then you can argue that it is overvalued.

However nothing is so straight forward and simple. The numbers on the balance sheet are just accounting expressions. Assets value can be greatly different in real life. It may be significantly less (see any writedown announcements e.g. by Slater and Gordon) or significantly more (like a software company or professional service business with little hard assets other than people and intellect). Graham's formula will be useful only in specific circumstances and must be sense checked. The BVPS method can also give false positives. Take a look at the last few announcements by RNY... and see how asset valuations can be dead wrong.

With A2M... earning clearly matters and is the basis of its valuation. Remember a company's valuation is the present value of future cashflows... and future cashflows include a combination of earnings and assets (when they are sold). A company may generate lots of earnings with very little assets (like a group of accountants who's only assets are computers and office furniture), and has a lot of value, but the BVPS method will in this instance indicate that the company is over valued. So the question to ask is... Does it really matter that A2M is able to generate such earnings with just $0.18 per share of asset?

* Indeed the correct expression is Assets = Liability + Owners Equity. The way to remember this is simply that, the left hand side shows what the company owns, the right hand side shows how these assets are funded.

You are right nothing is so straight forward or simple lol I'm still confused. When you say present value of future cash flows don't tell me I'd have to do dcf lol.

 

[luutzu]

Thanks lutzuu for the great chunk of info but I think you confused me even more

Re-read?

Revised what you understand of the Balance Sheet [statement of financial position].

The balance part is that Assets [the entire economic value a company controls] BALANCES [equal] to the Liabilities [what was lent to it, and what it owe to suppliers, employees, other creditors] PLUS Equity [what the owners cough up out of their own pocket].

Then you have to understand that assets might be worth more than the account say, or worth a lot less. More or less, by how much, you got to figure out by looking at the details.

Same with Liabilities... not all liabilities are bad as it could be cheap and free money suppliers and employees are owed. i.e. there's no interests on it. A good company could really make great use of that.

Draw it out. It'll make more sense. Not as hard as it seem.

 

[RandomInvestor]

Re-read?

Revised what you understand of the Balance Sheet [statement of financial position].

The balance part is that Assets [the entire economic value a company controls] BALANCES [equal] to the Liabilities [what was lent to it, and what it owe to suppliers, employees, other creditors] PLUS Equity [what the owners cough up out of their own pocket].

Then you have to understand that assets might be worth more than the account say, or worth a lot less. More or less, by how much, you got to figure out by looking at the details.

Same with Liabilities... not all liabilities are bad as it could be cheap and free money suppliers and employees are owed. i.e. there's no interests on it. A good company could really make great use of that.

Draw it out. It'll make more sense. Not as hard as it seem.

Ok thanks.

 

[Value Collector]

I am reading this book called "the little book of value investing" and it talks about Graham how he made the BVPS formula. And can tell you whether or not a company is undervalued, but I can't see how this makes sense? Bvps is simply total equity divided by shares outstanding what does this have to do whether or not the company is undervalued? It's not looking at the company from an earnings perspective or an asset perspective but an equity perspective by the looks of it?

The other thing as I am studying A2milk, this year its book value was 0.18 what does this mean? What do I do with this information?

It says if a stock is below its book value. Is it referring to the market price? So does that mean A2milk is potentially overpriced because its market price is higher than its bvps? What exactly is going on here?

The equity per share is what you are purchasing when you buy that share. (Hence why shares are often referred to as "Equities")

As a share holder you are an owner of that equity, and you seek to earn a profit in two main ways.

1, taking some of the income produced by that equity i.e. dividends

2, Selling that equity at a later date at a higher price, (which is easier if you bought the equity cheaply to begin with, or the equity grows over time through retained earnings, or the equity becomes more profitable)

---------------

It is definitely not as easy as just finding out book value, (book value is just the starting point)

You have to then work out how profitable that equity is, i.e. whats its return on equity.

and then make quality judgements about the likely hood of that equity staying profitable, growing its profitability and also the likely hood the company can continue retaining earnings and getting a high rate of return on the earnings they retain.

The Best investments will be the situations where you can buy equity for less than its book value, but the equity is earning high rates and the company can continue to add to the equity while still earning high rates.

Ben Graham used to value the companies based on what their dead bodies were worth, if he could buy them at a lower price than what they were worth dead, he would buy them, He saw this as a low risk approach because he was likely to get his money back if the company went bust, but if it lived and was profitable he would do very well.

I have done well over the years in situation where I bought companies for less than book value.

If you look back at the capilano thread there is a big discussion a few years back about how I valued it. I was buying shares at about $2.25 when their book value was over $3.00, and due to the nature of the assets that made up that equity I saw it as a very low risk purchase.

here is the way I way thinking about Capilano when I bought it, this. quote is from the thread back in 2014, when I was defending my claim it was worth over $5.25

Well they had return on equity of 14.6% for the 2013, that's not bad for that style of business.

Their capital is split between their property and plant ( about $19,000,000 ) and their inventory ( about $18,000,000)

the property and plant includes,

- the main packing facility in Brisbane which includes a packing building and a warehouse sitting on a large block of industrial land which they freehold and all the associated packing equipment.

- A secondary packing facility in perth, which they own all the equipment but rent the building under a lease

- a mothballed backup packing facility in Melbourne which they freehold,


the inventory include

- about 12months supply of bulk honey

- about 1 months supply of packed honey


There is currently about $4million dollars of excess Bulk honey inventory related to the purchase of the perth honey facility and brand "westco bee", Westco was a bee keepers co-op, and so bought more honey from the beekeepers than they could sell into the perth market, capillano will be able to move this easily so there will be a reduction in capital tied to this which will improve the figures from next year on.

They could get a higher return on assets if they sold the Brisbane packing shed and then rented it back on a long lease (like a lot of companies do) because real estate returns are lower than business returns in general, However I actually like the idea of having some of the capital exposed to industrial land and I think long term it will provide more stability.

they could also sell the mothballed Melbourne facility, they only kept it as a back up, but now the perth facility is running may end up being sold, this would reduce capital and increase the return on capital.

As far as historical returns, until about 2 years ago, capilano was a co-op, so it was more interested in buying as much honey as its members could produce and dumping it on the market rather than looking to produce high company profits, so the historical returns reflect that.

I see the competitive advantage being their brand and distribution channels, their low cost production and probably most importantly their relationship with the supplier bee keepers.

in regards to valuation, there are a few metrics that lead me to a valuation of a little over $5, as I said though my entry price was between $2.20 and $2.60 though because I like to have a decent margin of safety, the equity is currently $3.16 / share, so that provides a decent safety margin for me.