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I'm trying to calculate the real value of a business and, as an example, I picked Netflix.

From their latest financial statements I can see that:

  • Assets value is: $3,065,709,000
  • Liabilities value is: $2,417,386,000

So, their book value is $648,323,000 (correct?).

Now, according to MSN, there are 55.36 million shares available.

So, if Netflix would have the above mentioned book value (is this the correct term?) and the above mentioned number of shares, then the real value of their shares is actually $11.711/share.

If Netflix were to (hypothetically) go bankrupt immediately (considering that the numbers would be up to date and not from Dec. 31) and their assets sold & any liabilities paid, the shareholders would get only $11.711/share back.

Are the above calculations and conclusions correct?

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2 Answers

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And the kind folk at Yahoo Finance came to the same conclusion.

Keep in mind, book value for a company is like looking at my book value, all assets and liabilities, which is certainly important, but it ignores my earnings. BAC (Bank of America) has a book value of $20, but trades at $8. Some High Tech companies have negative book values, but are turning an ongoing profit, and trade for real money.

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No. The above calculation does not hold good. When financial statements are prepared they are prepared on a going concern basis, i.e. a business will run normally in the foreseeable future. Valuation of assets and liabilities is done according to this principle.

When a bankruptcy takes places or a business closes down, immediately the valuation method will change. For assets, the realizable value will be more relevant. For example, if you hold 100 computers, in an normal situation, they will depreciated at the normal rate. Every year, some portion of the cost is written off as depreciation. When you actually go to sell these computers you are likely to realize much less than what is shown in the statement. Similarly, for a building, the actual realizable value may be more.

For liabilities, they tend to increase in such situation.

Hence just a plain computation can give you a very broad idea but the actual figure may be different.

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+1 for mentioning going concern value vs. realizable value. But, re: "For liabilities, they tend to increase in such situation" ... Why might liabilities increase? –  Chris W. Rea Feb 8 '12 at 14:30
    
Well there are many liabilities which is not accounted for as a going concern principle. For examples, labour retrenchment compensation which at times can be very huge. In such a situation, closure is made after negotiation with the Union. Similarly there may be unaccounted for Government Dues. There may cost associated with closure and their related liabilities. Dividend (on preference capital) may be outstanding. –  Natwar Lath Feb 9 '12 at 1:39
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