I have just completed a major piece of analysis of the valuation of all publicly traded companies with a market cap of $500mn or more. My goal is not to understand whether they are fairly valued or not (if I knew this, this blog would be about fine wine and would be written from my private island rather than rainy New York) – my goal is simply to understand the extent to which their market value is explained by the assets on their balance sheets.
The objective is to ensure that management attention is focused on the assets that are truly driving business value in their industry, rather than the ones that are easiest to see and measure.
As at May 1 this year, tangible book value accounted for [drum roll here] 31% of the market value of the 4,196 companies studied (I excluded all financial services firms from the analysis on the grounds that the valuation of their assets is the subject of so much dispute currently). That means that two thirds of the value of the global economy is attributable to things that do not appear on the balance sheet.
This number is, of course, an average across all industry sectors. Tangible book value explains over 50% of the value of energy, materials, manufacturing and utilities companies but less than 15% of the value of telecoms, healthcare and consumer goods companies. So while it is appropriate for the former companies to focus primarily on production efficiency, the latter companies clearly need to focus on a different set of priorities.
What sort of things? Well, the international accounting standards board has suggested five types of assets that might account for the excess of a company’s value over its tangible book value – technology, contracts, artistic creations, customer information, and marketing. The next stage of my analysis is to determine how the importance of each of these type of assets varies by industry.
Believe me, it will vary.
