Website owner: James Miller
Book value. Of what significance is book value to the value of a stock? Consider the following. In a TV news report a day or two ago was a story of a fellow that had invented a new jump rope, made by stringing ceramic beads on a rope, that was selling like hotcakes. He had a whole bunch of people sitting around stringing beads on ropes and he was making millions selling them for $5.00 apiece (presumably he had a patent which prevented anyone else from doing it). What do you think the book value of this operation was? Probably, essentially zero. What would you say the value of the operation was? If it is bringing in millions in profits it is worth a lot. No book value but worth millions. What determines its worth? Its worth depends on what you feel its potential is in regard to the income stream you feel it can generate --- which depends on the demand for the product and how long you think that demand will continue. The pricing of a stock is determined primarily by its earnings and the public's perception of its potential for future earnings, or perhaps by crowd psychology and irrational buying, but not by book value. Feb 1996
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