The Little Book of Valuation: how to value a company [PDF]

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The Little Book of Valuation: how to value a company Book

The miscategorization of capital expenses, the sparing use of debt and the dependence on equity-based compensation (options and restricted stock), can create problems when we value these firms. Put more bluntly, the accounting measures of book value, earnings, and capital expenditures for firms with intangible assets are all misleading, insofar as they do not measure what they claim to measure and because they are not directly comparable to the same items at a manufacturing firm.

To value companies with intangible assets, we have to begin by correcting the erroneous accounting classification of capital expenses, and restate the fundamental inputs into value—operating income, capital expenditure, and return on capital. Once we make those corrections, these companies look very much like the companies in other sectors and can be valued using the same metrics.