Do Assets Make a Company
November 10th 2006 12:25
Is the size of a company's assets really important? Some people invest in a company because of its assets. What if inflation intervenes?
Warren Buffett, someone whom I have learnt much from, elucidates this point: suppose there are two companies, A and B.
Suppose company A has 500 in assets and company B has 1000.
Now suppose company A has a Net Profit of 500 and company B has also a Net Profit of 500.
I think what immediately jumps to you eye is that company A is more efficient than company B: it has a ratio Net Profit to Assets of 500/500 or 1. Company B instead has a ratio of 500/1000 or 1/2.
Now suppose that inflation ensues.
As it is known, the best way to win over inflation is, not only to increase prices,—but to increase sales as well.
Now suppose these companies want to double their sales. They will have to double their production capacity. And what will be the bill for company A? 500. And for company B? You guess it: 1000.
Assets don't make a company and I suppose this is the lesson. Otherwise, Ford Motor Co. US and General Motors Co. US would be great companies to invest in. They have lots of assets, yet their share price barely changed in one decade.
Warren Buffett, someone whom I have learnt much from, elucidates this point: suppose there are two companies, A and B.
Suppose company A has 500 in assets and company B has 1000.
Now suppose company A has a Net Profit of 500 and company B has also a Net Profit of 500.
I think what immediately jumps to you eye is that company A is more efficient than company B: it has a ratio Net Profit to Assets of 500/500 or 1. Company B instead has a ratio of 500/1000 or 1/2.
Now suppose that inflation ensues.
As it is known, the best way to win over inflation is, not only to increase prices,—but to increase sales as well.
Now suppose these companies want to double their sales. They will have to double their production capacity. And what will be the bill for company A? 500. And for company B? You guess it: 1000.
Assets don't make a company and I suppose this is the lesson. Otherwise, Ford Motor Co. US and General Motors Co. US would be great companies to invest in. They have lots of assets, yet their share price barely changed in one decade.
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