An ode to the end of a con

How long can deception go on?

When prices are set by banks printing debt

All trust in the “markets” is gone!


Two businesses, each earns $10.

Company A: Has $50 in net assets and produces $10 in earnings.

Company B: Has $1,000 in net assets and produces $10 in earnings.

  1. Which is the better business?
  2. Which is the better value?
  3. What is the difference in value between the two companies?

Anyone who doesn’t pass this quiz meets my Ex (Hoping won’t help; prayin’ won’t do you no good!

6 responses to “Pop QUIZ

  1. High ROC /low asset business is better business.

    Absolute value of 1000$-asset business is higher as assets can be liquidated (if we assume assets are worth 1000$), and valuation of 50$ asset-business is unlikely to be at 1000$ (1% earnings yield).

    Light asset business outperforms crazily when general price level rises. Thus W. Buffett’s “Fall on your knees and thank the lord for Mr. Bernanke”…
    Case study: Sears Candy


    • My questions were designed to mislead you. We could define high roc and low tangible asset business but what if the tangible assets are so old (and need to be replaced) that the values are near zero so ROC is high.

      If $1,000 in assets earns $10 and the cost of capital is 10% then assets worth $100 since EPV = AV.

      Both firms are EQUAL. $10 is = to $10 earned by both companies.

      Everything is context. But I didn’t give you context, just numbers.

  2. Anand Bangalore

    Company A earns same as company B but with lesser net assets which is good. Beacause it may not required higher capx and dep which will increase the owners earnings available to be distributed. If earnings increases with the same amount of assets of Company A.Then it should be valued higher than the company B.

  3. But you are making that assumption. See my reply above.

    Looks like you have to meet my Ex.

  4. Yeah content is important here.
    Both firms are equal in the sense that they earn equal amounts- $10, however all other things being equal, one uses far less capital and receives the same amount in earnings.
    When we start to consider things like debt and cost of capital and its effects on earnings and value then it opens things up.
    If that makes sense…

  5. Which is the better business? I don’t know
    Which is the better value? If A & B are operating in the same industry the company with higher assets earning power is doing a better job…but
    If I can get A for 5x earnings and B for 5x earnings…I’ll go for B
    What is the difference in value between the two companies? Assets… but I need some prices.

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