Reliability of financial data

Key Insight into Reliability of financial data

A key insight about Graham and value investing endures. This focus relates to the data’s reliability.

Current assets are the most reliable of all financial data. Valuation data become more unreliable as one moves down:

• the balance sheet from cash into longer-term current assets and into long-term assets,
• into the income statement and down it, and
• onto the cash flow statement.

Balance sheet data becomes less reliable for valuation because items tend to be more firm- or industry-specific:

· Every business can use cash so a dollar held is pretty much worth a dollar.

· Accounts receivable are generally more easily collected by the company that generated them, but they can be assigned or sold, and the buyer can collect most of what the company could (this commonly occurs by the process of factoring in the textile industry for example).

· Inventory can be used only by other merchandisers or manufacturers in the same or similar industries.

· Property, plant and equipment may be less adaptable even by peers, or can be illiquid.

· Goodwill is all but unique to a firm (other intangible assets such as trademarks, patents, and copyrights typically don’t appear on the balance sheet).


Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary