Modern Australian
Men's Weekly

.

To value companies like Amazon and Facebook, we need to look beyond dollars and assets

  • Written by John Dumay, Associate Professor - Department of Accounting and Corporate Governance, Macquarie University

Investors and business people usually value companies based on the balance of assets and debts at the end of a financial year. But our research found they should be valuing their employees’ ability to innovate while using their existing physical assets.

This is what actually creates value for our economy. For example manufacturing, an example of using assets to create value, is on the decline in Australia. Contrast this to services, using the skills of employees, which are increasing.

We came up with a modified way to predict the value of companies, removing the emphasis on assets and instead using measures of spending on research and development and copyrights.

We tested this revised model with accounting data from companies in countries like China, Malaysia, Russia, South Africa and Turkey. We also tested it with companies in more developed countries like Australia, Austria, Netherlands, Singapore and Sweden.

Research and development was positively associated with return on assets in Australia, Austria, the Netherlands, Singapore, Sweden, China, South Africa and Turkey, according to the model. This means that companies in these developed and emerging economies use their resources more efficiently because of their investments in research and development and copyrights.

For some of the biggest technology companies like Amazon and Facebook, the unique combination of their people, their invented systems and processes, and their physical presence creates value for the company and their investors.

If we can improve how we predict potential economic value, we can help companies and our economy to grow and become more efficient.

Traditional accounting methods

Today, the traditional accounting system has lost its relevance, because many of the resources companies use to do business cannot be owned and become an asset.

Traditionally companies calculate how much they own (assets) and subtract how much they owe (liabilities). The remaining amount, or book value, is what the company is worth.

To value companies like Amazon and Facebook, we need to look beyond dollars and assets People and their ability to innovate create economic value. Soeren Stache/AAP

But people are a key resource in any company, yet companies do not own people. The wages paid to them are an expense, but their value cannot be recorded in the company’s accounts.

Read more: Why accountants of the future will need to speak blockchain and cryptocurrency if they want your money

Similarly, accounting rules state that most research and development is expensed when it occurs, meaning it is counted as a cost immediately. The problem is that investments in people and research and development may not pay off until the future.

What this means for long-term investments

Amazon, for example, is spending billions of dollars on research and development. This would involve spending money on intangible resources such as copyrights, market research, branding and designing systems and processes. It will also invest in marketing to potential customers, training staff and hiring managers.

According to current accounting rules, most of these costs are treated as expenses now. It is only physical assets such as buildings, computers, furniture and equipment that are counted as a cost over time.

Read more: Companies may be misleading investors by not openly assessing the true value of assets

However, Amazon’s investment in its new distribution network is likely to reap significant returns in the future. The fact that accounting reports analyse the past year, six months or quarter, shows how accounting is too focused on the short term. In the long term, Amazon is actually worth about 25 times more than accounting suggests.

Because investors are interested in the future returns from their investments, not what was spent in the past, the stock market values most modern companies at several times their book value. This makes modern accounting even less relevant in explaining economic value.

A new approach

Our research found that to understand how economic value is created, you need to look at what businesses are spending on long term resources such as research and development and copyright and treat it as an investment, rather than a cost.

Even if a company is not making a profit because it is investing in research and development in the short term, this does not mean it is not capable of making money in the long term.

Many companies like Amazon never made a profit in their early years as they burned cash to create their foothold in the market. But their investors were convinced these companies would create economic value by way of profits and increased share prices in the future.

If we look beyond the book value of companies, we can truly understand how they create economic value.

Authors: John Dumay, Associate Professor - Department of Accounting and Corporate Governance, Macquarie University

Read more http://theconversation.com/to-value-companies-like-amazon-and-facebook-we-need-to-look-beyond-dollars-and-assets-94578

How To Keep Vase Flowers Fresh Through Australia’s Coldest Months

Winter flowers develop slowly, which gives them stronger structure and longer vase life Heat from indoor environments is the biggest threat to th...

Artificial Intelligence is Powering the Growth of Australian Telehealth Services

Many Australians have traditionally experienced difficulties in accessing timely and quality healthcare, especially those who live in rural or remot...

Powering Shepparton’s Businesses: Expert Commercial Electrical Services You Can Count On

When it comes to running a successful business, having reliable, compliant, and efficient electrical systems is non-negotiable. From small retail ou...

Maximise Efficiency: Cleaner Solar Panels for Optimal Performance

Solar panels are a smart investment in energy efficiency, sustainability, and long-term savings—especially here in Cairns, where the tropical sun ...

7 Common Air Conditioner Issues in Melbourne – And How to Fix Them

Image by freepik Living in Melbourne, we all know how unpredictable the weather can be. One moment it’s cold and windy, the next it’s a scorchin...

Powering Palm QLD with Reliable Electrical Solutions

Image by pvproductions on Freepik When it comes to finding a trustworthy electrician Palm QLD locals can count on, the team at East Coast Sparkies s...

The Smart Way to Grow Online: SEO Management Sydney Businesses Can Rely On

If you’re a Sydney-based business owner, you already know the digital space is crowded. But with the right strategy, you don’t need to shout the...

What Your Car Says About You: The Personality Behind the Vehicle

You can tell a lot about someone by the car they drive—or at least, that’s what people think. True Blue Mobile Mechanics reckon the car says a l...

The Confidence Curve: Why Boudoir Photography Is the Empowerment Trend You Didn’t Know You Needed

Boudoir photography has been quietly taking over social feeds, Pinterest boards, and personal milestones—and for good reason. It’s not just abou...

Understanding Level 2 Electricians: Why Sydney Residents Need Licenced Experts for Complex Electrical Work

When it comes to electrical work around the home or business, not all electricians are created equal. In Sydney, particularly when you're dealing wi...

Retirement Anchored in Model Boat Building for Waterford’s Doug Unsold

WATERFORD — When Doug Unsold sees his ship come in, it’s usually one he’s crafted with his own hands. The 67-year-old retiree from Waterford ...

The Science Behind Alarm Clocks and Your Circadian Rhythm

Waking up on time isn’t just about setting an alarm—it’s about working with your body, not against it. At the heart of every restful night and...

How to Use Plants to Create a Calming Atmosphere in Your Home

In today’s fast-paced world, cultivating a calm, soothing environment at home has never been more important. Whether you live in a busy urban apar...

How Maths Tutoring Can Help Students Master Maths

Mathematics can be a daunting subject for many students, often causing stress and frustration. However, maths tutoring has proven to be an effective...

Refurbished iPads Are Better Than New Ones (Here's Why)

Image by rawpixel.com on Freepik Apple's refurbished iPad program has quietly become one of the best deals in tech. While everyone obsesses over the ...

Your Guide to Finding the Right GP: What Perth City Doctors Offer Today

Choosing a General Practitioner (GP) is one of the most important health decisions you’ll make. Luckily, Perth’s vibrant CBD now hosts a new ge...

Why Every Mining Operation Needs a Robust Safety Management System

Mining is one of the backbones of the Australian economy, particularly in Western Australia. Back in 2019-20, mining contributed 10.4% of Australiaâ...

Australian Classic Literature Enjoys Resurgence

Welcome back to the good old days of storytelling! As the modern world becomes increasingly more demanding, returning to childhood favourites offers...