Baruch Lev and Feng Gu’s book is a must read according to Forbes Magazine.
We rely on financial reports for vital information, but ‘these documents are flawed and insufficient when it comes to investors and lenders in the current economic climate’, says Baruch Lev, former professor at NYU, in the excellent Cipher Vision podcast.
He says we need new indicators that focus on strategy and execution, and to identify and evaluate a company's true value-creating resources, such as intangible assets.
If resources create value, then ‘they should appear on the balance sheet’ but says Lev you will not find Pfizer’s patents for their Covid vaccine on their balance sheet! You will not see their patent applications, grants, abandonments or royalty revenues. You will only see patents listed on the balance sheet if they have been acquired from an external source (another company), but not if they were developed internally!
Patent applications for example provide reliable information about a company’s future technology capabilities.
Such strategic assets are unique and cannot be copied easily, e.g. the google search algorithm is a trade secret and would take several decades to replicate.
Baruch Lev is a strong advocate that strategic assets ought to be captured in company accounts and that rather than worrying too much about valuation; they should be at least listed to show the investment made in those assets.
For the interview with Baruch Lev see the Cipher Vision Podcast on Spotify here
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