THE IMPORTANCE OF GROWTH

A firm can be valuable because it owns assets that generate cash flows now or because it is expected to acquire such assets in the future. The first group of assets is categorized as assets in place and the second as growth assets. Figure 11.1 presents a financial balance sheet for a firm. Note that an accounting balance sheet can be very different from a financial balance sheet, since accounting for growth assets tends to be both conservative and inconsistent.

For high-growth firms, accounting balance sheets do a poor job of summarizing the values of the assets of the firm because they mostly ignore the largest component of value, which is future growth. The problems are exacerbated for firms that invest in R&D, because the book value will not include the most important asset at these firms—the research asset.