The ASX tables of companies listed
by size of their market capitalisation should not be confused with reality when
judging companies for either size or potential value. The fact that a company
has X million shares on issue and the last sale price of a couple of thousand of
them was $Y does little to convince any real thinkers that the company’s actual
value is $XY million. Only an amateur would draw that

Allow yourself to consider this scenario. I have
two oranges in my hand. You offer me 50 cents each for these two oranges. I
accept. Result – last sale price of oranges is 50 cents. BUT, I also
have another 100,000 oranges outside in my truck, and now that we know
the last sale price is 50 cents we also know that the value of all my
oranges is 50 cents x 100,000 = $50,000 – right? Wrong!

The real value of my oranges is what someone
(the highest bidder) will pay for them. If I tried to sell all of them I’d be
lucky get $2,000 for my truckload of beautiful oranges. The “market cap” of my
oranges may be $50,000 but the real value is nowhere near that

And so it is also true – to at least
some extent – with the share market capitalisation valuations we see published
every day. One of the world’s shrewdest investors, Warren Buffett, often talks
about buying shares only in companies where you’d be prepared (and he could have
added, were able) to buy the whole company. He may have been making a slightly
different point, but the gist of the logic remains – values have to consider the
whole, not just a part of an entity.

It may be best for those unaware of such realities to desist from
treating market cap tables as a true measure of the size or the value
of a company, let alone as some sort of “premiership ladder”! The
function of measuring market cap is merely to give some guide as to the
possible liquidity (ie ability to sell into a ready market) of a
companies’ shares. That makes some sense therefore, of NOT counting the
government’s shares in Telstra, as until they are “in play” they are
effectively not in contention to be counted – except erroneously as
part of some “premiership ladder.”

Investors and journalists need to
look for quality information rather than crude measures of size when making
judgments about companies. Sure, size matters – but it’s still more about what
you do with it….

Peter Fray

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Peter Fray
Editor-in-chief of Crikey