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Exploring different measures of value
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What is the first thing that comes to
mind when you think of the word value?
0:01
Value is a fascinating topic.
0:07
For a lot of people, when they hear
the word value, they think of price.
0:09
Or how much one values a friend, or
perhaps it's a motto to live by.
0:14
That's all perfectly fine.
0:19
But when it comes to business and
specifically finance and accounting,
0:21
value has some concrete meanings.
0:25
In this video, I want to explain
the difference between book value and
0:29
market value.
0:33
Earlier in the course, we've touched
on the concept of book value.
0:35
This is the dollar figure associated
with particular line items
0:39
on the balance sheet.
0:43
If someone asks what the book value
of your current liabilities is,
0:45
then you would go to the balance sheet and
look for
0:49
the dollar figure on
the current liabilities line.
0:51
Usually in everyday situations,
people wanna ask that.
0:54
They'll just ask you what
your current liabilities are?
0:58
But that is technically a book value.
1:01
It's more common for
1:05
someone to ask about book value in
the context of your overall business.
1:06
What's the book value of the business?
1:11
To answer that,
you'd go to the balance sheet and
1:14
look at the number in
the total equity line.
1:16
And that's the book value of the business.
1:19
Some people might ask what is essentially
the same question in a different way
1:22
by asking, what are your net assets?
1:27
Can you see why?
1:30
Net assets are your total assets
minus your total liabilities,
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which is equal to the book
value of your equity.
1:36
We'll get into market value in a second.
1:40
But what's interesting to me about book
value is that it can factor in things that
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aren't tangible.
1:46
We discussed intangible assets and
1:48
amortization a bit earlier
on in this course.
1:50
The concept of good will, and how a
company can put a value on its brand, and
1:53
that shows up as a line
item in it's balance sheet.
1:56
Coca-Cola had over 6 billion in
trademarks with indefinite lines on their
1:59
balance sheet in 2018.
2:04
And that's just one of
their intangible assets.
2:05
In the teachers notes, you'll find
a link to Coca-Cola's 10K for 2018.
2:08
And you can go to page 81, and read
their footnote on how they account for
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intangible assets.
2:16
Disney had over 30 billion in intangible
assets on their balance sheet in 2018.
2:18
So just think about that for a moment.
2:23
If book value of equity is equal
to total assets minus total
2:25
liabilities in a company as billions
of dollars in an intangible assets.
2:30
That means that part of the book value
of equity is based on intangibles.
2:35
That's a very interesting topic of
conversation for accounting and
2:40
finance nerds like myself.
2:43
Anyhow, now we're clear on what book
value is, let's talk about market value.
2:45
Market value is the price that the market
is willing to pay for an asset.
2:50
With publicly listed companies,
this is a very easy to determine value
2:54
because the real time stock price of
a company is available all the time.
2:58
>> There are lots of ways you can
look up stock information online, and
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one resource is Yahoo Finance.
3:08
>> So, let's look at the market caps
of a few different well-known publicly
3:11
listed companies.
3:15
How about, I know their ticker is AMZN,
but spelled it out anyway.
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So here have some stock information.
3:25
We can see the price to earnings ratio,
and the earnings per share.
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Different quotes and
ranges for the past 52 weeks,
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but the current price
is $1,819.26 a share.
3:37
And that means the market cap
of Amazon is $893 billion.
3:43
Market cap is short for
market capitalization.
3:50
It is the value that the market
places on a business.
3:54
It is calculated by taking the current
share price of a company and
3:58
multiplying it by all the outstanding
shares of that company.
4:02
Let's look at a few other companies.
4:07
How about Boeing, let's look at Boeing.
4:10
There we go.
4:14
Boeing's stock price is $372.70, and
4:16
their market cap is $210 billion.
4:20
What about GM, General Motors?
4:25
$37.35 stock price,
market cap, 52 billion.
4:31
So GM is currently valued by
the stock market at $52 billion,
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whereas Amazon was well over 800 billion.
4:43
How about a newer stock, that TWLO,
they just IPOd recently about,
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within the past 12 months, I think.
4:53
And their stock price is at $135,
4:56
and their market cap is 16.765 billion.
5:00
Let's take a look at their
one year trend has been.
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Going up.
5:09
Good job, management.
5:10
Okay, and how about one more.
5:12
GE, General Electric company.
5:15
Okay, their stock price is $10.27,
and their market cap is 89.4 billion.
5:18
Well, let's compare their market
cap to their book value of equity.
5:24
Fortunately, we can retrieve that
information very easily here online.
5:28
So.
5:34
We have their financial statements.
5:37
Let's look at the balance sheet for
the year ending.
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We can go to quarterly information.
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The most recent quarter available is
the same as the year-end data And
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here we go, we're down in
the stockholders equity section.
5:51
So the book value of the stockholder
equity is $30.975 billion.
5:54
Because all these numbers
are in thousands.
6:02
So 30.1 billion, let's call that,
and go to the summary.
6:05
And the market cap is 89.
6:13
So, their market cap is well
above their book value.
6:15
And that's totally normal.
6:19
So as you can see,
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the book value of a business is not
always the only way to value a business.
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And is perhaps not the best way, right?
6:29
It's easy to determine the market
value of a publicly listed company.
6:32
But this is slightly more difficult for
private companies since
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the market information is not
readily available and dynamic.
6:39
Again, we're not gonna get into
how investors actually conduct
6:44
valuation exercises in any
length in this course.
6:47
But it's important for you to understand
the difference between the book value and
6:51
market value of a business.
6:54
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