Ask the Experts

As I understand it book value per share = shareholders equity/number of shares. What does it mean when expressed as a percentage?

That's correct. A company's book value per share is shareholders' equity divided by the number of shares on issue. The same result will be achieved by deducting total liabilities from total assets and then dividing the result by the number of shares on issue. Book value per share is also sometimes called 'net asset backing'. If you were to deduct intangible assets from the numerator, then it would be called 'net tangible asset backing' (or NTA per share)

We're unsure about it being expressed as a percentage, though, as it is a value per share, not a percentage. Sometimes book value per share is expressed as a ratio of the share price, which may be what you are referring to.

Say a company has a book value of $1.00 per share. If the shares were trading at $3.00, then you could say the stock is trading at '3 times book'. Alternatively, if a stock with a book value of $1.00 was trading at 70 cents, then you could say it was trading at '70% of book'.

Are the stock recommendations in The Intelligent Investor made according to the strict fundamental analysis guidelines advocated by Warren Buffett and the like?

The reality is that there are no 'strict guidelines' laid down by Buffett. Benjamin Graham, who was Buffett's teacher, practiced a 'brand' of value investing quite differently to the 'brand' eventually adopted by Buffett. Some value investors look purely at the numbers when assessing value (such as Graham), others will not invest unless management is of the highest quality (such as Buffett). Unfortunately there are relatively few 'Buffett-type franchises' in Australia, so to restrict ourselves to those would mean we would miss a lot of opportunities. As we said in The Intelligent Investor's issue 182 cover story, there is more than one type of value investing. We prefer high quality businesses with excellent management, but we will also invest in lower quality businesses if they are cheap enough. What matters is that you understand what you are buying, and never pay too much. If you stick to those rules, then you can't go too far wrong. Whatever type of value investing works for you is the type you should adopt.

What are options? Can I consider it dodgy if company directors buy options in the company rather than shares?

Options give the holder the right, but with no obligation, to buy shares at a set price in the future. In this way, the holder gets the potential upside, without the any of the downside. That's because if the shares are trading below the stipulated 'exercise price' on the relevant date, then the holder can just let the options lapse. You can read more about this issue in the Investor's College articles we published in issue 97 and issue 98 of The Intelligent Investor. You can download these for free by heading to the Investor's College search function here. While it's not 'dodgy', options do give company management the upside without the potential downside. We'd therefore prefer that management bought shares in the company with their own money than issue themselves options. If the latter is occurring instead of the former, then we're more inclined to think they are feathering their own nests.

On the recommendation of YOUR MONEY WEEKLY, of which I am a subscriber, I bought ARQ at 2.01 on 17.10.05. It has dropped to 1.775. What do you think I should do? Thank you.

Unfortunately The Intelligent Investor does not research ARQ, so we cannot provide an opinion on it. Normally, if we were to make a recommendation, a 10% fall would not concern us in the slightest as we are long term investors. As we are not sure what time frame Your Money Weekly has considered, you had probably best clarify the time frame with them.

I have never bought shares before and am interested in buying something 'ethical' to hold for at least 5 years. Any advice?

We're unable to provide individual stock recommendations unfortunately. And the problem we have, as value investors, is we don't want to buy something ethical unless it is also good value. A company such as Cochlear, for example, which develops bionic ear implants, would be considered ethical by many people because it develops a product required by deaf people. You can read about Cochlear, and other stocks, by subscribing to The Intelligent Investor. But therein lies a problem - just what is ethical? To different people it means different things, and selecting stocks must therefore be an individual decision. Some people regard banks as ethical because they don't generally hurt the environment, others regard them as unethical because they make huge profits - the choice is never clear. First and foremost, we suggest you select cheap stocks, and if they also meet the ethical criteria you specify, only then should you invest. Finally, congratulations on your long term time frame - we agree that it's the best way to build wealth.

I recently purchased shares in Korab Resources Ltd prior to the float. How do I go about having them added to my CHESS list of holdings?

The application forms for new floats usually provide a spot for your Holder Identification number, so it will happen automatically if you fill out that section. Just be aware that the name and address details on the form will have to match those with your broker/CHESS exactly. If you don't fill out this section, or the details don't match, you will receive a statement of holding from the company once the shares are allotted. You then need to send this statement to your broker so that they can register the stock under your CHESS account with them.

When a company announces a non-renounceable rights issue, as Malachite Resources has recently, what does 'non-renounceable' mean? Also, when the offer includes one new option with each new share, what does this mean?

A non-renounceable right issue means that you will not be able to sell the rights on market (whereas with a renounceable rights issue, you can sell them). In other words, you either take the rights up (pay money for the new shares) or you lose the entitlement. It's not uncommon for explorers to offer options with new share issues, either. An option is the right, at some point in the future, to buy more shares in the company at a certain price (in Malachite's case, at 20 cents by 31 August 2008). So if, for example, Malachite shares are 25 cents by 2007, you would have the obviously valuable option to buy a share trading at 25 cents for 20 cents then. Because there is always a possiblity that Malachite shares will be worth more than 20 cents at some stage before the options expire, any options issued have some value. That's why they are sometimes offered as a carrot to induce shareholders to take up their rights.

Why does the NTA sometimes vary greatly from the share price? In particular, IYS has an NTA in excess of $8 and a share price of $1.30.

Your question should probably be phrased the other way - why does the share price often vary from NTA! We're not sure about this particularly security, which looks strange - this sort of discount to NTA is rare, which suggests there is more to the story than meets the eye. Further analysis would be required, but this sort of 'bargain' is rare. There are many reasons why a stock can trade above NTA - indeed it is normal for companies do so. This is usually because the market believes the company is worth more than the value of its assets. Some companies, such as media businesses, can trade way above NTA because most of their assets are intangible. Poorly managed companies that are businesses, sometimes trade below NTA. The Investor's College series on our parent company's website at www.intelligentinvestor.com.au provides more educational material on this sorts of topic if you are interested in doing further research.

BHP's dividend yield is currently about 1.5%, which is well below the market average, yet the stock keeps going up. Why do investors keep bidding the price up ?

Resource companies tend to have lower yields than the market anyway - they are not usually suitable for investors seeking income for that reason. But perhaps more importantly, BHP has been benefiting from China-inspired euphoria in commodity markets, which has increased prices for many of the commodities it sells. The problem is that these prices may not be sustainable, so we think BHP's profits may well be lower in the long term than they are now. To summarise, our parent publication, The Intelligent Investor, thinks BHP is fairly expensive at the moment.

In articles about particular companies, e.g. PBL, you quantify risk: 'fundamental' and 'share price'. Can you explain this concept?

We refer you to the website of our parent publication The Intelligent Investor (www.intelligentinvestor.com.au). If you navigate to the free Investor's College section and search for issue number 135, it will explain all about our risk ratings. But we just use numbers now rather than exclamation marks. Just remember this golden rule: the higher the number the higher the risk, with one being the lowest and five the highest.