Namaste!
In this article, I am sharing my understanding of the following subjects. Please correct me if I am wrong in any of the mentioned things.
1. Book value is a value of total assets over total liabilities. Means, Total Assets - Total Liabilities.
2. Meaning, the amount available to the shareholders (per share) whenever the company goes into liquidation.
3. Book value highly depends on the nature of business. For banking companies, it is higher because they treat their given loans as assets. Whereas, for IT companies it is very low because their business doesn't require much of the assets like Plant & Machinery (they're not a manufacturing company), etc. They have a lot of employees as their assets, but by definition, employees are not assets since companies do not have control over them.
4. Book value increases/decreases overtime because of the following factors:-
a. Asset value decreasing factors: Depreciation (plant and machinery, etc), so as the Cap-Ex (Capital Expenditure). You know, this is a substantial expense, especially for the telecom companies and manufacturing companies, etc. This is not the case for IT companies.
For banking companies, increasing NPAs (non-performing assets). Decreasing market price of assets (for e.g. companies that have an intangible asset like "Patents", they are in demand now but soon the technology becomes old and priceless). "Goodwill", goodwill increase or decrease, totally depends on how the acquirer company values and calculates it.
b. Liability increasing factors: Loan interest payments (because our total liabilities increase). New loans and provisions, lawsuits (contingent liabilities), etc.
5. So, when the company goes bankrupt, your stock price doesn’t actually become zero. Because, you will be getting something in return due to a book value per share. After secured creditors, debentures, preference shareholders.
Fun-fact: Reliance Power shares are still publicly traded because it didn’t liquidate till now. It has a book value of Rs 36.1 per share, mostly coming from assets like land (Rs 5,887 crore), Plant and Machinery (Rs 37,137 crore), etc.
6. The share price is still falling, one reason is that the interest burden is still increasing YoY. Some banks have written it as a NPA, some are still trying to restructure.
In this article, I am sharing my understanding of the following subjects. Please correct me if I am wrong in any of the mentioned things.
1. Book value is a value of total assets over total liabilities. Means, Total Assets - Total Liabilities.
2. Meaning, the amount available to the shareholders (per share) whenever the company goes into liquidation.
3. Book value highly depends on the nature of business. For banking companies, it is higher because they treat their given loans as assets. Whereas, for IT companies it is very low because their business doesn't require much of the assets like Plant & Machinery (they're not a manufacturing company), etc. They have a lot of employees as their assets, but by definition, employees are not assets since companies do not have control over them.
4. Book value increases/decreases overtime because of the following factors:-
a. Asset value decreasing factors: Depreciation (plant and machinery, etc), so as the Cap-Ex (Capital Expenditure). You know, this is a substantial expense, especially for the telecom companies and manufacturing companies, etc. This is not the case for IT companies.
For banking companies, increasing NPAs (non-performing assets). Decreasing market price of assets (for e.g. companies that have an intangible asset like "Patents", they are in demand now but soon the technology becomes old and priceless). "Goodwill", goodwill increase or decrease, totally depends on how the acquirer company values and calculates it.
b. Liability increasing factors: Loan interest payments (because our total liabilities increase). New loans and provisions, lawsuits (contingent liabilities), etc.
5. So, when the company goes bankrupt, your stock price doesn’t actually become zero. Because, you will be getting something in return due to a book value per share. After secured creditors, debentures, preference shareholders.
Fun-fact: Reliance Power shares are still publicly traded because it didn’t liquidate till now. It has a book value of Rs 36.1 per share, mostly coming from assets like land (Rs 5,887 crore), Plant and Machinery (Rs 37,137 crore), etc.
6. The share price is still falling, one reason is that the interest burden is still increasing YoY. Some banks have written it as a NPA, some are still trying to restructure.
Comment:
If you can get this stock at <= Rs 2.1, it can give 200% return (a bounce back) in upcoming weeks or months. BUT, you should be ready to stomach 50% or more downfall (volatility) before investing.
Comment:
The company mention value of fixed assets at a "market price" in the balance sheet. Hence, book value can be sometimes less at the time of actual liquidation. Because in India, fixed assets are sold at a "hair-cut", i.e. maybe 5-10% below the market price.
Comment:
I lost 1% of my portfolio in Birla Tyres Ltd. Its book value was -88.20 which I didn't pay much attention before buying. It went bankrupt. The company which was taking over decided to "write off" all the shares. I did buy this company because of curiosity and a learning lesson.
Comment:
I expect anyone who is reading my writings to know that there is nothing "certain" in the markets. Neither the %gain on stock nor "out-performance" or "under-performance". There is a risk and opportunity cost involved in both, buying and selling. Selling at any price can often result in "opportunity loss" when the stock moves higher and higher. Human psychology is a culprit here. For e.g. I post any stock which seems undervalued or overvalued to me on tradingview. When anyone makes money on that, they wont appreciate me "a single word". But when they lose or it results in opportunity loss, they are bound to blame me. I don't criticize any person, because I know their psychology has defeated them. At last, there is nothing like "easy money" in the markets. The survival of the fittest holds absolutely true here.
Comment:
Vodafone Idea (Vi) has a negative book value too (-18.7 per share). If you compare Yes Bank and Idea, investment in Idea is more risky than Yes Bank. There are two things can be done. One, prefer investment in Yes Bank as compared to Idea. Two, if you have both shares at a similar price (like Rs 10 or so), set target for Idea double the target of Yes Bank, for e.g. Yes Bank target Rs 50, Idea target Rs 100. Of course after consulting your financial advisor.
Comment:
I forgot to add most important thing in book value increasing factor, which is Net profit. The Net Profit adds up in the book value over time. Similarly, Net loss results in book value decreasing. Asset lite companies and growth companies (Like APPLE, MSFT, AMAZON, NETFLIX, NVIDIA, PAYTM, ZOMATO, etc have book value lesser than value companies and conservative mature companies, because they focus on growth over anything else. The small and infant companies grows and can grow at faster pace until maturing (like Ford, GM, Intel, etc). Intel like companies were growing at very fast space (between 1985 to 2000) until they have matured. Mature and value companies pays dividends, growth companies mostly not.