The book value is dead. Long live the book value!

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: A fund manager in a leading mutual fund (MF) always takes a conservative approach to investments. He is scared of the IT sector in India as he feels anybody can launch a software company as the entry barriers are low and very few can really survive. He is undecided about investing in TCS, the biggest software services company in India. The reason being TCS has a book value (BV) of Rs 69.17. But at the same time, he is not averse to investing in Infosys, as it has a BV of Rs 193.70.

Knowledge capital

Many analysts argue that comparing knowledge companies in terms of their BV does not make sense, as these companies do not have fixed assets like land and buildings. They have what is commonly known in management parlance as 'human capital'.

Most analysts take an easy approach and say that the difference between the market price and the BV is basically the money that an investor wants to bet on knowledge.

As against TCS, Infosys does hold a lot of assets in the form of land and buildings, which can be liquidated in case of a crisis. Infosys is currently traded at a price of around Rs 2412.95 with a price/book value (PBV) of 12.5.

Many companies feel that human assets are not being reflected in the balance sheet and thus the asset per share is low. If human capital is properly accounted for in the balance sheet, then the balance sheets will be able to reflect a proper BV of the firm.

Says Sandeep Nanda, head of research at Sharekhan, "Even if we show human capital in the balance sheet to reflect the right BV, that will not really be of much help. In such a case, the return on networth (RONW) will fall for these companies. Currently, software companies enjoy a very high return on networth. A rise in BV will bring down the RONW drastically if they start valuing human capital in their balance sheets. The RONW is one measure that manages to capture everything about a company. It does not really matter if it is a knowledge company or for that matter an old economy firm." Apart from knowledge capital, there are other problems with BV. The measure fails to show hidden assets in a company.