The totals of assets and liabilities appearing on the balance sheet supply only a rough indication of the size of the company. Balance sheet totals may be readily inflated by excessive values set upon intangibles, and in many cases also the fixed assets are arrived at a highly exaggerated figure.
On the other hand, we find that in the majority of strong companies, the good will which constitutes one of their most important assets either does not appear upon the balance sheet at all or is given but a nominal valuation (usually $1). There was once a practice of writing down the fixed assets, or plant account, to virtually nothing in order to save depreciation charges. Hence it is a common occurrence to find that the true value of a company's assets is entirely different from the balance sheet total.
The size of a company may be measured in terms either of its assets or of its sales. In both cases, the significance of the figure is entirely relative, and must be judged against the background of the industry. The assets of a small railroad will exceed those of a good sized department store.
From the investment standpoint - especially that of a buyer of high-grade bonds or preferred stocks - it may be well to attach considerable importance to large size. This would be true particularly in the case of industrial companies, for in this field the smaller enterprise is more subject to sudden adversity than is likely in a railroad or public utility.
Where the purchase is made for speculative profit, or long-term capital gains, it is not so essential to insist upon dominant size, for there are countless examples of smaller companies prospering more than large ones. After all, the large companies themselves presented the best speculative opportunities while they were still comparatively small.
Benjamin Graham
On the other hand, we find that in the majority of strong companies, the good will which constitutes one of their most important assets either does not appear upon the balance sheet at all or is given but a nominal valuation (usually $1). There was once a practice of writing down the fixed assets, or plant account, to virtually nothing in order to save depreciation charges. Hence it is a common occurrence to find that the true value of a company's assets is entirely different from the balance sheet total.
The size of a company may be measured in terms either of its assets or of its sales. In both cases, the significance of the figure is entirely relative, and must be judged against the background of the industry. The assets of a small railroad will exceed those of a good sized department store.
From the investment standpoint - especially that of a buyer of high-grade bonds or preferred stocks - it may be well to attach considerable importance to large size. This would be true particularly in the case of industrial companies, for in this field the smaller enterprise is more subject to sudden adversity than is likely in a railroad or public utility.
Where the purchase is made for speculative profit, or long-term capital gains, it is not so essential to insist upon dominant size, for there are countless examples of smaller companies prospering more than large ones. After all, the large companies themselves presented the best speculative opportunities while they were still comparatively small.
Benjamin Graham
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