- Alright, I'm a little embarrassed
to have to tell you this,
but I have to tell ya the whole truth.
The balance sheet is not perfect.
There are some limitations,
so I better tell you what those limitations are.
Better you hear it from me, than from somebody else.
First, when you look at the balance sheet,
most of the numbers you see
are not market values, they're costs.
You say, well what's the big deal?
Well, it can be a huge deal.
Let's say you've got a company that has some land
that it bought 50 years ago, for $5,000,
and the land now, 50 years later, is worth $2 million.
Well, what's going to be reported on the balance sheet.
The amount reported on the balance sheet
is the original cost, the $5,000 cost from 50 years ago,
not the current market value.
This often misleads people,
because when they look at the balance sheet,
they think they're seeing market values.
That's not true, most of the numbers on the balance sheet
are original costs, not current market value.
So, that's the first limitation of the balance sheet.
The second limitation is worse.
Some very valuable economic assets
are not reported at all in the balance sheet,
especially intangible assets.
For example, what are the most important
economic assets of Apple?
Well first, the Apple logo, the Apple name.
Think how much you'd have to pay to buy the worldwide rights
to use that name, Apple.
It would be tens of billions of dollars,
same thing with the logo.
And an even more valuable intangible asset,
is the relationships that Apple has
with all of its customers around the world.
If you're an Apple user, you are loyal.
If Apple comes out with a new product,
you're going to buy the thing.
The customer loyalty is a valuable asset
for a company to have.
An existing base of loyal users,
that's an asset that may be worth
several hundred billion dollars.
So, those crucial economic assets,
the logo, the name, those customer relationships,
for how much are they recorded at
in the Apple balance sheet?
Zero, because Apple never had to pay
to buy those economic assets,
as a result their accounting cost, zero.
Apple never had to pay anybody else to buy its name,
it just developed that name.
Apple didn't have to pay anybody else to buy its logo,
the company created the value of that logo.
Apple didn't have to buy its relationships with customers,
the company created those valuable relationships itself.
So, the intangible assets that a company grows itself,
creates itself, organic homegrown intangibles,
they're recorded at zero on a balance sheet,
and for many companies,
these assets are the most important assets they've got.
This exclusion of homegrown intangibles
can cause a big discrepancy
between a company's recorded accounting value
and its actual market value.
For example, as of June 30, 2018,
Apple's total recorded assets were $349 billion.
At the same time, the actual market value,
or market capitalization of the company, $1 trillion.
In other words, the actual value of the company
was roughly three times as much
as its recorded accounting assets.
Clearly, the balance sheet isn't capturing
all of the value of Apple.
Those are the limitations of the balance sheet.
Now you know the truth, the balance sheet is great,
but it's not perfect.