When deciding if an investment/acquisition makes sense you check the IRR, MoM etc If you are finally comfortable with this should you go ahead with the acquisition if your price is more than A - L?
I see when buying Berkshire, Warren Buffet had purchased the company at approximately the value of its current assets minus all liabilities thus paying almost nothing for the property, plant and equipment and any going concern value of the business.
Seems quite wrong that one can click "buy" by just by focusing on the DCF and ignoring the Balance Sheet.
Depends on the company obviously, but in "The Intelligent Investor" (the most famous investing book ever written) if current assets-total liabilities is positive there is few other considerations you must make. You need to check for consistent earnings (will these continue), and also look at dividends. The author Benjamin Graham would definitely buy if these three conditions are in check because if the company were to liquidate they could cover all obligations with current assets alone. The other big category is looking to see operating cash flows is consistent and healthy. I don't know if that is what you're looking for, but that is my $.02.
Lots of great investments sell for multiples of book value. Lots of terrible investment opportunities that could be had for 1x book. It just depends on the industry dynamics, when the assets were marked, and the cash flow potential going forward. I've basically completely abandoned P/B type analyses at this stage of the cycle because there is very little information content in the reported equity values for many businesses that I cover.
First of all, how does this ignore the balance sheet? Assets (on the balance sheet) - liabilities (on the balance sheet) is shareholders equity. Effectively this is the liquidation value-if you bought the company, paid off all liabilities with assets, and then kept the left over.
If a company is functioning properly, then it will be worth more than its liquidation value due to future cash flows in perpetuity. If a company is functioning poorly or the market believes so (say market cap is less than shareholders equity), then the company risks being purchased and liquidated.
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