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Why book value has lost its meaning

BABY-BOOMERS may recall, perhaps wistfully, how the golden-arched sign outside every McDonald’s restaurant would proclaim how many customers had been served by the chain. As they became adults, the number kept on climbing: 5bn in 1969; 30bn in 1979; 80bn in 1990. Jerry Seinfeld, a wry chronicler of the trivial, was moved to ask: “Why is McDonald’s still counting?” Do we really need to know about every last burger? Just put up a sign that says, “We’re doing very well.”The counting stopped. The signs said simply: “Billions and billions served”. If this seems unhelpfully vague, that is how the counting business sometimes is. Many of America’s biggest companies, including McDonald’s, report a negative book value, a gauge of a firm’s net assets. Many more have a book value that is small relative to their market value: their shares look dear on a price-to-book basis. Much of this is down to the complexity of valuing a firm’s assets in the digital age. But the result is that price-to-book is a bad guide to a stock’s true value.
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