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Book value is (not) equal to market capitalisation

  1. 1. Why book value is (not) equal to market cap?
  2. 2. Following 7 minutes • Book Value vs. Market Capitalisation • Investor‘s vs. Accountant‘s point of view • Conlusion and recommendation
  3. 3. Book Value Total Assets – Total Liabilities
  4. 4. Market Capitalisation Number of Shares×
  5. 5. Price × Book Value 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Coca Cola Apple McDonald's Book Value Price per share Coca Cola Apple McDonald's Source NYSE NASDAQ NYSE Price per share 42,24 449,98 102,92 Market Cap 188.13B 423.02B 103.21B P/BV ratio 5,76 3,58 6,75
  6. 6. “This spread is particularly caused by fundamental, technical a psychological aspects of price movement.”
  7. 7. “Yes, but I think it is more caused by an inaccuracy in accounting…“
  8. 8. “…that is caused by insufficient legislation of accounting for intangible assets.“
  9. 9. UFF
  10. 10. Legislation ×
  11. 11. Intangible Assets An Intangible asset in an identifiable non- monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. (IAS, 38)
  12. 12. Criteria for initial recognition • Must be identifiable • Expected future economic benefits attributable to the asset would flow to the entity • Cost could be measured reliably • Asset is controlled by the entity
  13. 13. Examples of Intangible Assets Logo Company‘s reputation Research and Development Domain Name Patent Copyright utility models industrial designs Know-how trademarks Brand Value ? ? ? ?Skillful Staff?? ? ? Goodwill ?
  14. 14. Revaluation • Fair market value • Possible only if there is an active market for an asset
  15. 15. Consequences • Not possible to recognize existing assets in their fair value (e. g. recipe for Coca-Cola or Coca-Cola logo) • Not possible to revaluate recognized assets • => Book value is undervaluated
  16. 16. Conclusion and Recommendation If company could recognize and revaluate most of their intangible assets this could reduce spread between market cap. and share value and company‘s value would be more transparent – investments would be safer.
  17. 17. http://www.michalblazek.cz/elearning

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