The asset value of a company refers to the cash that can be derived from selling the assets of a company, after settling its debts. Typically, a company will carry some cash and inventory for operational purposes, as well as own land and buildings, and specialized equipment required in its particular industry. The study of value investing began with an analysis of asset values of companies shortly after the Great Depression, when large numbers of companies were selling not only below book value, but below the value of the cash they had on hand. Even today, asset plays are sometimes available. A classic asset play relies on the fact that the value of land is carried at cost on the books, but may in fact be worth much more than that. For example, a bankrupt retail chain may own hundreds of prime real estate that has not been taken into account in its stock price, simply because its worth is not obvious from a casual inspection of its balance sheets.
Typically, I do not consider the asset value of a company when estimating its value, because I assume that the business will operate indefinitely into the future, and the underlying assets will never be liquidated. I make an estimate of the company’s asset value to ensure that its liabilities are adequately covered by the value of its assets. A company can carry its debt indefinitely as long as it meets its interest payments and the debt is adequately secured against its underlying assets. If liabilities were to exceed assets (negative asset value), then the liabilities will eventually have to be paid from the company’s earnings, so the value of the company will have to be reduced. In other words, I ignore a positive asset value (typically small), but take into account a negative asset value when assessing the total value of a company.
In my experience, asset plays are rare in the modern stock market. I have once casually examined several companies trading below book value, but they all hemorrhaging cash badly, and I expect that their book value will eventually drop. I have never executed an asset play. If you have had experience with an asset play recently, I would appreciate it if you can share your tale with me.
