The problem is what it leaves out. These days, the value of a firm lies as much in its reputation, its processes,
the know-how of staff and relationships with customers and suppliers as in tangible assets.
Putting an accounting value on these intangibles is notoriously tricky. By their nature, they have unclear boundaries.
Not every dollar of R&D or advertising spending can be ascribed to a well-defined asset, such as a brand or patent.
That is in large part why, with a few exceptions, such spending is treated as a running cost, like rent or electricity.
Increasingly price is detached from book value. The median price-to-book of S&P 500 stocks is 3.0.
But plenty of well-known companies, whose competitive edge rests on brands or patents, have much higher ratios or even negative book values.
McDonald's has considerable brand value, which is not on its balance-sheet. It also has property assets that have been fully depreciated.
The effect of mergers is to make things murkier.
If, say, one firm pays $100m for another that has $30m of tangible assets, the residual $70m is counted as an intangible asset—
either as brand value, if that can be gauged, or as "goodwill". That distorts comparisons.
A firm that has acquired brands by merger will have those reflected in its book value, says Simon Harris, of GMO, a fund-management firm;
a firm that has developed its own brands will not. Share buy-backs make things murkier still. For any firm with a price-to-book greater than one,
a buy-back will diminish book by proportionately more than it lowers the value of outstanding stock. So price-to-book rises further.
Some have called for accounting rules to change. But the more leeway a company has to turn day-to-day costs into capital assets,
the more scope there is to fiddle with reported earnings. Better to spur the disclosure of spending that adds to intangible value.
Analysts can then make their own judgments. Mr Harris finds that adjusting book value to reflect past R&D
and advertising spending makes for more useful comparisons across stocks.
It is not a perfect gauge. But no single measure—whether price-to-book or billions of customers served— can ever tell the whole story.