Value Investing, Videos

Accounting vs. Investing Value

Property plant and equipment (PP&E) value and brand value. A very interesting discussion on how accounting value is one, while investing value is something completely different.

PP&E
Pexels / Pixabay

Accounting vs. Investing Value – PP&E + Brand

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q3 hedge fund letters, conference, scoops etc

Transcript

Good day for investors. I recently made the video on Taata and there were two excellent comments where there is so much to learn and discuss about value how we define how we quantify and what actually at the end value investing is and what is the equalizer that can help us all see whether something is 100 percent value or it is not really 100 percent value that cannot lose its value. Let me start with the comments.

Our wind doctor didn't understand why the rising property plant and equipment numbers portend that the business is weak. As I said in his opinion it only tells you that the company is spending money for future growth as they're investing in new plants. In this case with data they are investing in a new plant in Slovakia. Manufacturing equipmentetc. Could I please explain this again and then the second question is from Amir ra. How much do you value their brand. That's an important part of the valuation. So how to value a brand and how to value property plant and equipment. So the company was started that we discussed in the other video so let's go to check data again to see OK what's the value there. How can we discuss that. And then it's at the end with investing. It will be up to you see what do you what is the number that you attach to property plant and equipment or brand value. Let's start with property plant and equipment. The first thing is if you look at row number free Net property plant and equipment you'll see that okay they already spent the money over the last year as gross property plant and equipment went from 753 billion rupees doesn't matter the currency isn't important here to one point four billion. So it's almost doubled. Also that property plant and equipment is significantly up. So they have been investing in property plant equipment but that didn't reflect itself into revenue as revenues were two point six billion trillion rupees and now they are two point nine trillion rupees. So that actual expected future growth that should keep that value of property plant and equipment didn't come as property plant and equipment is just an accounting measure you don't impair this as long as it depreciates You're simply the straight line or whatever they use. So. So yes the property plant and equipment if we look at Roe free has gone up but revenue didn't go up proportionally.

So if you look at it from a business perspective they're investing a lot. But there are no returns from their investment. So the property plant and equipment yes has a cost. So that is the cost that you see on the balance sheet and that cost what they spent for that has increased. However it didn't return value to shareholders as revenues didn't increase proportionally to that investment in the property plant and equipment which means that their business is actually becoming more and more capital intensive and less profitable for shareholders. And that's also another reason why the stock price is down so it's very important to see OK what is the result of investing in property plant and equipment. And it always boils down to one equalizer and that is cash for investment property and better equipment and those factories print out cash to shareholders than the value of the property plant and equipment is great. If not then that is something to really question. When you look at such companies that have huge capital requirements and very very competitive markets and brother.