Bill Nygren, Portfolio Manager at The Oakmark Funds, has just released a video which highlights the importance of considering intangibles when valuing businesses today saying:
“The linkage between book value and business value has been broken because so many important assets today are intangibles and don’t even show up on the balance sheet.”
Here’s an excerpt from the video:
GAAP accounting was really invented for the industrial age, an asset heavy economy, where your most important assets were buildings and factories. In more and more of the economy today book value isn’t a good measure of business value. The linkage between book value and business value has been broken because so many important assets today are intangibles and don’t even show up on the balance sheet.
Things like R&D expense or customer acquisition costs. As companies are trying to expand their global platforms. When you look at a bio-technology company for example, the R&D spend that they do today, that will benefit them for the next decade, all gets expensed immediately, depressing their reported earnings.
So you need to look deeper that the reported GAAP EPS number when you think about how much value has been added in a company in any given year.
Here’s the video:
You can watch the original video here.
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