Most Internet companies, however, do not promise a positive return within the next year. Or the next, or the year after that. What they do promise is losses for the first three years, followed by world dominance and huge profit margins. Price to book multiples thus don t tell us much about the company s valuation. Trends in book value can, however, tell us a little bit about management.
Trends reflect the long run return on a company s assets.
No one ever talks about an Internet company s assets. Internet companies don t have a great variety of them, after all. Just cash, some receivables, and a smattering of investments. But even with relatively simple balance sheets, you can still tell the difference between good management and bad. This lack of fixed capital makes the company very liquid but also means that it cannot use its assets as collateral for bank loans or other forms of corporate debt.