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How to Invest In Asset Companies And What Are Their Risks?

One may be able to carry a big bulk of cotton but is not able to hold a piece of a metal, due to their differences in density and weight.

Likewise, some companies may appear to be big, however, their assets may not be as “heavy” or “valuable” next to companies that own a bigger bulk of assets.

But how can we hone the ability to scan these companies, identify their types of assets and liabilities, value them and eventually, buy this asset-rich companies at the right prices?

When assessing asset companies, what we are looking for are companies that have high “density”; in other words, companies that own a lot of assets. We will then evaluate their worth before comparing it to its price.

In this article, we will be sharing two key criteria when assessing asset-rich companies

1. Price to Tangible Book Value

Normally, investors would look at Price to Book Value, where they would compare the company’s share price with its Net Asset Value. If an investor pays Price to Book of higher than 1, it just means they are paying a price higher than the company’s net assets value, and vice versa. Easy peasy.

However, there are companies that build their businesses through Merger and Acquisition, where the management would often pay the target company a much higher price compared to their Book Value, resulting in high Goodwill that appears in the company’s list of assets – essentially intangible assets that are worth nothing most of the time.

Click here to understand more about Goodwill and Intangible Assets. https://www.instagram.com/p/B2jjoy2AJOV/

That’s why it is much more reasonable and safer to look at a company’s Tangible Book Value instead.

To illustrate this, we will be using Kraft Heinz as an example.

Kraft Heinz Tangible Book Value on WealthPark
Kraft Heinz Tangible Book Value on WealthPark

Their Book Value Per Share (TTM) is at USD 42.35 at the moment, whereas their current share price is USD 27.08 – definitely looks like a steal.

However, if you look at their Tangible Book Value per share, it is at -27.37, a negative tangible book value.

Having gone through several M&As over the years, the company have actually accumulated a large amount of Goodwill in their books, which have inflated their asset value in the eyes of unsuspecting investors.

What these investors did not realize however, is that they are merely investing in a big load of goodwill and intangible assets. In other words, they are buying a bag of potato chips with only a few chips in it, and a full bag of air.

This is a prime example of why we should NEVER make decisions based on Price to Book alone, as we would have been easily fooled by the numbers, and unwittingly purchase something that has negative value.

 

When it comes to asset companies, investors also typically love companies that own quality assets like cash, land or even properties. Most of the time, these companies are developers or properties management companies that own the assets.

Sino Land, a property developer that builds, sells residentials and commercials properties in Hong Kong and Mainland China, also own some of the best hotels like Fullerton Hotel, Conrad Hong Kong, Westin Sydney.

Sino Land Tangible Book Value on WealthPark
Sino Land Tangible Book Value on WealthPark

Looking into their numbers, they have good Price to Tangible Book Value, as their Book Value Per Share and Tangible Book Value Per Share has been consistently uniformed over the past 5 years, which means most, if not all their assets are Tangible Assets.

Moreover, their current share price is way below their Tangible Book Value.

2. Net Current Assets Value Ratios

As great as that sounded though, land and properties are illiquid assets that are difficult to cash out in desperate times.

Therefore, it much safer for investors also find companies with liquid assets that are able to cover their total liabilities almost immediately if needed.

And one of the most common ways to do that is by measuring their Net Current Assets Value Ratio.

Net Current Assets Value Ratio = Current Assets / Total Liabilities

Sino Land Net Current Assets Value Ratio on WealthPark
Sino Land Net Current Assets Value Ratio on WealthPark

The higher the ratio, the better, as that would mean the company has more current assets than they do debt.

From the screenshot, we can see that Sino Land is more than able to cover their liabilities with their current assets, which means investors can be rest assured that this company will not get into any debt troubles anytime soon.

 

So, there you have it, asset enthusiasts – the two most important metrics to identify in asset companies!

If you are a WealthPark subscriber, both ratios are easily searchable and readily available for you under Star Chart > Assets

Kraft Heinz Star Chart on WealthPark
Kraft Heinz Star Chart on WealthPark

Sino Land Star Chart on WealthPark
Sino Land Star Chart on WealthPark

And if you’re NOT a WealthPark subscriber, take it for a test drive at $0.00 for 7 days and you will see just how handy this tool is.

You can even check the scores for your current investment to see if their Net Current Assets Value Ratios and Price to Tangible Book Value are sound or not.

Your time is much too precious to spend on calculating these ratios manually, ONE AT A TIME, just so you can find a fantastic company to invest.

Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author(s) involved in the writing of this piece do not have current vested interest of the company. Please consult a competent professional for expert financial, or other assistance or legal advice.

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Eric Ong

Eric Ong

Eric spends most of his days working on WealthPark together with Growth team, creating content for all users to make their investing journey smarter, faster and easier. You may see his videos and articles on various social media and sites. Eric is also a trainer with VIC, conducting programmes mainly in Mandarin.

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