Market Valuations Are Flawed Measures of Value


Market valuations are determined by a stock’s last sale, multiplied by the number of shares outstanding. Therefore, the last sale may be made by the least informed, most fearful or greedy of shareholders. Stock investors assume there will be a “greater fool” available when they want to sell. Market valuations do not reflect debt/equity ratios.

The traditional analytical tool, the price/earnings ratio (P/E), reflects the history of per share earnings, and the market’s aggregate assessment of likely future levels of per share earnings. Market volatility impacts share prices and therefore company market valuations.

Reported profits are largely discretionary and therefore using the Return On Assets (ROA) requires an understanding of factors impacting the reported profit of a company. What decisions of management impacted or changed the reported profits? Was the management incentivized to report maximum profits, paying maximum taxes or rather to invest greater amounts in research, staff training, increased facilities or other actions which, at least initially, reduce reported profitability? If company profits are misleading, ROA is as useful as a broken tool.

Companies experiencing rapid revenue growth frequently require additional capital to sustain and further expand their growth. Traditional financing is achieved through the sale of shares of the company and is dilutive of the investment positions of existing shareholders.

The simpler approach to financing companies is buying a share of their revenues, a revenue royalty, rather than a share of ownership. Revenues are verifiable on a daily basis. Revenues are factual and not subject to biased interpretation and stock price valuation factors. The owners of royalties do not have an ability to influence or pressure company management.

Royalties are the better way of both investing in and financing of companies, especially privately-owned companies.




Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100

© Copyright 2019 British Far East Holdings Ltd. All rights reserved.



Blog Management: Viktor Filiba

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.