We recommend using a composite of ratios when valuing a firm because no perfect measure of value exists. Doing so reduces the impact of each measure’s inherent shortcomings when the ratio is used in isolation.
Book value is an incomplete measure of a firm’s assets. Given the growing importance and increasing share of intangible capital in total company capital, adding measures of intangibles provides a more complete measure of firm capital.
Including intangibles when estimating a firm’s value has a greater impact on smaller companies. Mega-cap growth stocks, notably, the FANGs, still look expensive after incorporating intangibles in the value of firm capital.
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