YouMaketheCall 135This use of the wor d“value” is mislea ding. Balance sheets list
assets at their cost when acquire drather than their current value
(or in some cases at current market values if lower). The balance
sheet report of the carrying amount of assets does not reflect in-
creases in value under current market conditions. And while the
long-term assets are shown less the depreciation on them, that is
only an approximation of what it woul dcost to replace them rather
than an exact figure.
The range of book values per share is as broa das the range of
businesses itself, an dall those values reflect historical acquisition
costs rather than current values. The book value per share of our
sample illustrates this. GE’s is about $12; Microsoft’s, about $6; and
Amazon.com’s, about $2.^4
These numbers correctly suggest that the usefulness of book
value decays when more productive activity is performed with fewer
rather than more tangible assets (as more production is generated
not by, say, steel mills an dother factories but by information tech-
nologies an dInternet distribution systems). The fact that GE’s book
value per share is six times Amazon.com’s may reflect more the
greater asset intensity of GE’s business compare dto Amazon.com’s
than the value of those businesses.
For a whole range of businesses, the current accounting system
base don historical cost is han dicappe din appraising present an d
future values. For example, GE’s property, plant, an dequipment if
sol dat current market prices woul dfetch a substantial multiple of
the book value per share; Amazon.com’s might fetch only about what
the book value says, chiefly because all its assets were acquired
within the past few years.
Not only does this cost principle mean that some assets listed
on a balance sheet are worth far more than their liste damount, it
also means that the opposite is true. Even if book value purports to
reflect the amount for which a company coul dbe sol d(its liqui da-
tion value), it cannot reflect the circumstances under which a sale
is held. A business liquidation conducted under or caused by adverse
conditions may lead to assets such as inventory and equipment and
machinery being sol dat a loss compare dto their balance sheet carry-
ing amounts.
For some companies, losses on major assets such as plants and
warehouses can be enormous. If Disney were liquidated, for exam-
ple, there is reason to doubt that its theme park fixed assets—an
important part of its book value—coul dbe sol dat their book value.