Saturday, December 11, 2010

Implications of Liquidating Value

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Wall Street holds that liquidating value is of slight importance because the typical company has no intention of liquidating.

This view is logical, as far as it goes. When applied to a stock selling below break-up value, the Wall Street view may be amplified into the following :

"Although this stock would liquidate for more than its market price, it is not worth buying because :
1. the company cannot earn a satisfactory profit, and
2. it is not going to liquidate.

In the previous post suggested that the first assumption is likely to be wrong in a number of instances, for, although past earnings may have been disappointing, there is always a chance that through external or internal changes the concern may again earn a reasonable amount on its capital.

But in a considerable proportion of cases the pessimism of the market will at least appear to be justified.

We are led, therefore, to ask the question :
"Why is it that no matter how poor a corporation's prospect may seem, its owners permit it to remain in business until its resources are exhausted? "
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