What makes Warren Buffett (Warren Buffett) proud$Berkshire Hathaway-A (BRK.A.US)$(Berkshire Hathaway) has accumulated far more shareholder equity than any US company.
By the end of the first quarter,$Berkshire Hathaway-B (BRK.B.US)$Total shareholders' equity reached an impressive $572 billion, far higher than the $337 billion of JPMorgan Chase (JPM), which ranked second. Shareholders' equity is a company's total assets minus total liabilities. It is a measure of the company's net assets.
Berkshire CEO Buffett said at the May annual conference: “This really shows that as long as you save money for a long time, you can achieve the expected results even without any miracles.”
Berkshire's shareholders' equity grew from around $20 million when Buffett took over the company in 1965, and continued to grow through steady earnings growth, successful acquisitions, and smart equity investments.
Although Buffett will always keep records, most investors don't pay attention to shareholders' equity, or the book value of the company. This indicator is seen as an old-fashioned valuation index favored by deep value investors, and is less relevant to high-yield companies with strong profitability but few shareholders' equity, such as Apple and Nvidia. Investors would rightly see earnings as a key driver of share prices, but shareholder equity is still important.
In the words of Buffett's mentor and legendary value investor Benjamin Graham, if shareholders' equity is large enough relative to the company's market value, it can provide a margin of safety.
Many investors still base their valuation of many companies, including banks, insurance companies, and Berkshire, on their book value. Take Berkshire as an example. The current stock price is about 1.5 times its March 31 book value (1.5 times net market ratio). Over the past five years, the average book value of Berkshire shares was 1.4 times higher. Berkshire's Class A shares closed at $60,8816 on May 29.
“Barron's” selected based on data compiled by Bloomberg as of December 31, 2023$S&P 500 Index (.SPX.US)$Among the 10 companies with the highest absolute level of shareholders' equity, the net market ratio of these 10 companies is also shown in the table below.
After Berkshire and J.P. Morgan Chase, the eight companies in that order are$Bank of America (BAC.US)$,$Alphabet-A (GOOGL.US)$,$Exxon Mobil (XOM.US)$,$Citigroup (C.US)$,$Microsoft (MSFT.US)$,$Amazon (AMZN.US)$,$Wells Fargo & Co (WFC.US)$und$Chevron (CVX.US)$. Among them, Chevron, which ranked 10th, had shareholders' equity of US$162 billion.
The second and third largest companies by market capitalization after Microsoft did not appear on the list. As of March 31, it ranked second in market capitalization$Apple (AAPL.US)$It has shareholders' equity of 74 billion US dollars, and the one that ranks third$NVIDIA (NVDA.US)$At only $43 billion, that's insignificant compared to its current market capitalization of $2.8 trillion.
There are certain limitations to using shareholders' equity as a valuation method, and Buffett also acknowledged this. First, many investors are concerned about tangible book value, that is, shareholders' equity after excluding goodwill and other intangible assets mainly derived from acquisitions. This “hard” book value can better measure tangible assets such as cash, real estate, factories, and equipment, and can also better measure the bottom line of a stock's value than total shareholders' equity.
Buffett pointed out at the annual shareholders' meeting that J.P. Morgan Chase's return on net assets is higher than Berkshire Hathaway. The latter's return on net assets after tax is less than 10%, while Apple's return on net assets exceeds 100%. A higher return on net assets is usually associated with a higher price-earnings ratio.
Furthermore, large-scale share buybacks reduce shareholders' equity, making them less important. For example, Apple has implemented one of the largest share buyback programs in the US over the past ten years. Berkshire has made numerous share buybacks over the past five years, and some believe book value is not as important to the company as it used to be.
Despite its limitations, the book value valuation method can still be used as a way to screen for cheaper stocks.
Notably, although Citigroup's stock price has risen 20% to $61 this year, the current stock price is only 60% of its book value. Part of the reason Citi is bullish is that its share price fell far below book value, breaking the net market ratio, and management, led by CEO Jane Fraser (Jane Fraser), is taking steps to boost the bank's weak return.
Both Bank of America and Wells Fargo have net market ratios of 1.1 times, but according to accounting standards, the huge book losses of more than $100 billion in Bank of America's 600 billion dollar bond portfolio are not reflected in shareholders' equity.
Tech giants Microsoft, Amazon, and Alphabet all have high net market ratios. For them, shareholder rights are no longer the focus of most investors. However, an important component of shareholders' equity — cash — is still highly valued by investors, and all three companies have sufficient cash.
Editor/Jeffrey