This is not to say that asset valuations on the balance sheet are inherently wrong. In the worst-case scenario, it is likely to be discounted or less valuable than what’s stated on the balance sheet. Some items, such as certain intangibles, may even be egregiously inflated, leading to huge disparities between what investors can derive from the balance sheet and what they ultimately receive.
The three main financial statements investors should use for analysis and valuation of a company are the income statement, balance sheet and cash flow statement. The goal of analysing and valuing a company should be to estimate the price at which the investor thinks the company should be trading. This is the company’s intrinsic value.
For investors who prioritise financial safety when computing a company’s intrinsic value, a more thorough assessment and valuation of worst-case net assets, book value, or shareholder equity is recommended. Specifically, it is mostly used to review items on the company’s balance sheet. Essentially, this is to arrive at an “adjusted” or “discounted” net asset value, book value, or shareholder equity that is more realistic and conservative, accounting for the individual nature and fluctuations of each item on the balance sheet.
