Is investing in asset stocks truly safe? Many people expect high returns through asset stock investments, but there are various risk factors hidden behind it. In this article, we'll explore the safety of asset stock investments and discuss the precautions you should take when investing.
What is a Margin of Safety?
Benjamin Graham's 'margin of safety' refers to when the market capitalization is less than two-thirds of the sum of cash and cash equivalents, accounts receivable, and inventory, minus liabilities. This criterion assesses whether the amount remaining after a company's bankruptcy is greater than the shareholders' investment. However, when a company actually goes bankrupt, cash and cash equivalents are depleted, and the value of accounts receivable and inventory tends to decrease. On the other hand, liabilities remain unchanged, which becomes problematic. Additionally, the asset values on the financial statements include acquisition-related costs, so they cannot be considered 100% asset values. Assets that can only be used in specific industries or intangible assets like goodwill are also difficult to recognize at fair value. Collecting accounts receivable from a company on the brink of bankruptcy can be challenging.
Financial Statement Analysis and Reality
Let's assume you analyze a company's financial statements, verify cash and cash equivalents, accounts receivable, inventory, and invest in a company with a margin of safety. Will the assets recorded on the financial statements at the time of your investment remain intact until the company is on the verge of bankruptcy? Would a company, short on funds, declare bankruptcy while leaving the most liquid assets untouched? Even if some assets remain, creditors will likely try to recover their money quickly, leading to assets being sold at bargain prices. After creditors, bondholders, and preferred shareholders take their shares, how much will be left for common shareholders? This scenario assumes that no internal stakeholders embezzle company assets. If even executives of stable companies sometimes embezzle company funds, can this be guaranteed? Additionally, if the company's major assets are tied up in collateral agreements, they may be lost upon bankruptcy. While such details should be disclosed in business reports, companies on the brink of bankruptcy might omit or improperly disclose these details.
Liquidation Value and Investment
In fact, it is somewhat absurd for stock investors to consider a company's liquidation value when investing. It's like drinking kimchi soup without thinking about the remaining rice. Stock investors, who invest expecting high returns despite the risks, scramble not to lose a penny when faced with danger. This situation must be bewildering for creditors.
Investment Conclusion
When investing in asset stocks, it is crucial to consider various risk factors thoroughly. The margin of safety and financial statement analysis alone are not enough; it is essential to comprehensively assess the company's actual situation and bankruptcy risk. Asset stock investments should not be decided based solely on figures in financial statements.
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