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Sunday, 13 September 2009

Intrinsic value increases simply with accounting policy change

The intrinsic value of a company is its actual value based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value.

Most often intrinsic worth is estimated by analyzing a company's fundamentals.

Intrinsic value is the actual value of company, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often difficult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i.e. what investors are willing to pay for the company) and intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value.

There is no universally accepted way to obtain this figure.


The fact that intrinsic value is the actual financial value of a company based upon the value found directly within the business and that it refers to the value of a company which is contained in the company itself means that the intrinsic value of all companies with positive shareholders equity will increase simply with a change in accounting policy from the real value destroying traditional Historical Cost Accounting model to measuring financial capital maintenance in units of constant purchasing power as authorized by the International Accounting Standards Board in the Framework, Par. 104 (a).

Par. 104 (a) states: “Financial capital maintenance can be calculated in either nominal monetary units or in units of constant purchasing power.”

This will increase the intrinsic value of most probably all companies on the Johannesburg Stock Exchange and most unlisted companies in SA.

Kindest regards,

Nicolaas Smith

PinkPolkaDot summary: Inflation-adjusting companies´ capital and retained profits (like accountants do with salaries) plus other constant items, will increase companies´ internal funding from equity (their capital will be maintained instead of unknowingly destroyed by their accountants) and increase their intrinsic values.