More On Working Capital

More On Working Capital

More on Working Capital

Total assets less prior claims = what remains for ordinary shareholders

32m less £l2zn = £20m

2om

Asset value per share= £2

lOm

Assuming that the share is valued on the market at 30s, the 'asset value is well above the market value. This indicates that the assets are probably being under-employed and are not yielding sufficient earnings. Other determinants apart, this could be an opportunity to invest in this company, since in due course a takeover bid and/or more efficient management could increase the earnings considerably.

The real value of a share is not its market value, which is only a face value, nor is it the 'asset value', as this cannot be realised, the company not being likely to wind up and distribute the residue to the ordinary shareholders. The real value of a share lies in its potential future earnings, based on its £net asset backing'. Thus:

Market value is a face value.

Net asset backing is the foundation of potential future earnings.

It is the 'earning power' residing in the value of the 'assets' (but only as exploited by the business acumen of the management) that counts.

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