The Daily Angle

New Stock Valuation Method: Price to Book to Price to Tangible Book

Thanks for the comments,

To clarify, first I ran a stock screen for companies with P/B below 1. Then I looked at the balance sheets from those companies and subtracted any line items listed as either "goodwill" or some form of "intangibles" from the "net stockholders equity" value. (For example, on Dow Chemical's most recent 10-Q - tinyurl.com/8opmv2 - under "Other Assets" the company lists both "Goodwill" and "Other Intangible Assets".) I then divided the market cap by this new value to derive my "Price to Tangible Book". The rest of the calculation was relatively straightforward and described in the article.

The idea was get a better look at a company beyond their listed book value which, as you both have pointed out, contains goodwill. I also believe that other "intangible assets" may often be incorrectly valued as their is no necessary intrinsic worth to these numbers.

Let me know if that answers your questions.

On Jan 06 08:22 AM Tom Armistead wrote:

> Agree with previous commentator, when book value is higher than tangible
> book value it is normally the result of goodwill from acquisitions.
> Some companies do large numbers of successful acquisitions, in which
> case the goodwill is a mark of success: they bought businesses and
> made money because they never had to recongnize impairments.
>
> In other cases, the goodwill is an impairment waiting to happen:
> the acquisitions were poorly timed or they overpaid for what they
> bought.
>
> I think the author is attracted to the concept of assets that are
> not reflected in book value. One place to look is physical assets
> that have been depreciated or kept at original cost: meanwhile inflation
> or increases in replacement cost have increased their value. Some
> retailers own a lot of real estate, as an example.
>
> Another possibility is R&D expense: GAAP does not permit capitalizing
> R&D but in some cases R&D creates patents or customer relationships
> that are extremely valuable. So a company trading around tangible
> book value that has high R&D expense may have intangible assets
> that are not reflected on the books at all.