Schweser says price / book multiples are not valid or useful for service companies. Can anyone explain why not?
Because what’s the book on a world renowned computer consulting company for example? Well, they own some depreciated office furniture and some computer equipment. Maybe some marketable Red Bull left in the fridge…
In other words, P/BV doesn’t give you any information when the revenue-producing assets aren’t on the balance sheet. For service companies, “your assets walk out the door every evening”, and their BV = 0. This would be similar for a firm whose primary value comes from other unbooked assets, such as unrealized goodwill. As an example, high-end jeanswear is like this. One recent acquisition booked 80% of purchase price to goodwill. What was P/BV for the firm before being acquired?