Warren Buffett: Earnings and not book value are what determine the value of a business.

 

 

@5.45  

Earnings are what determine value and not book value.  Book value is not a factor we consider.  Future earnings are a factor we consider.  

Earnings have been poor for many great Japanese companies.  If you think the return on equity of the Japanese companies is going to increase dramatically, then you are going to make a lot of money in Japanese stocks.  But the returns on equity of Japanese businesses have been quite low, and that makes a  low price to book ratio very appropriate because earnings are measured against books.  

A company earning 5% on book value, I do not want to buy it at book value, if I think it is going to keep earning 5% on book value.     A low price to book ratio means nothing to us.  It does not intrigue us.  In fact, if anything, we are less likely to look at something that sells at a lower value in relation to book than something that sells at a higher relation to book.  The chances are we are looking at a poor business in the first case and a good business in the second case.