Rule #1 Finance Blog

With Investor Phil Town


Welcome to the introduction to Rule #1 course. This is Tutorial 9: Zombie Value- The Tangible Book Value of the company.

This is part 9 of a 9-part series on How to Invest using Rule #1 strategies
Part 1: Rule #1 Strategy- Overview of the Basics
Part 2: Meaning- The Three Circles
Part 3: Moat- A Durable Advantage
Part 4: Moat- The Big Four
Part 5: Management- Owner Oriented
Part 6: Margin of Safety- The Growth Rate
Part 7: Margin of Safety- Sticker Price and MOS
Part 8: Margin of Safety- Payback Time
Part 9 [You are Here]: Zombie Value- Tangible Book Value

What is Zombie Value or Tangible Book Value?

Sometimes, when we’re looking at businesses we want to look to see what would they be worth as the living dead. Most of the time, what we’re looking at in a business is what the future cash flow is and then figuring out what’s the value of that today.  That’s what we call the margin of safety analysis that you’ve already learned. We also use the future earnings of the company to figure out the payback time analysis. Future earnings are key to understanding the value of a living business, but what about a business that’s selling for less than what it would be worth if it was dead?

We call this a zombie business. The value of a business that’s dead is called its tangible book value or we call it zombie value. Zombie value is the tangible book value of the business per share. What that means is we’ve figured out what this business would be worth if the business is dead and doesn’t do anything in the future at all.  If we can buy it cheaper than that, and it’s still a good business then that would be a heck of a deal.

How to Find Tangible Book Value of Business Per Share

So let me show you how to figure that out. First, the formula for figuring out tangible book value is really simple.

Going over to the balance sheet, we find the line of equity. Then we subtract the intangibles. Then we subtract the cost in excess. What’s left is the tangible book value or what we call the zombie value of the business. If we can buy a business for the zombie value or less and it’s not a zombie, if it’s a wonderful business and it’s selling for less than zombie value, that’s a super good deal. I’ll give you an example of that right now.

We’re going to take look at Goldman Sachs.  Now we’re going to go over and see the balance sheet, you can see that it has $70 billion dollars on the balance sheet equity line. We’re going to subtract the intangibles, which are $5.46 billion. We’re going to subtract the cost in excess which is zero and what we end up with $64.9 billion. This is the zombie value of Goldman Sachs. Then, we’re going to divide that with the 485 million shares it’s got outstanding. We end up with $134 dollars of zombie value per share. Now keep that in mind, $134 dollars of zombie value per share.

Finding Zombie Value on Goldman Sachs Using Rule #1 Toolbox

I’m going to take you live on to the Rule #1 Toolbox. I’ll show you how to find that $134 bucks and then we’ll compare it to where Goldman Sachs was selling just a few months ago.

Looking at Goldman Sachs on stock at a glance, what I’m going to do is go over to the balance sheet. We’re going to go to the most recent full year, which is 2011. We want to do this right up to date, but that’s not a problem, we can just look at the SEC documents.

What we see is that there is an equity line as we scroll down and its $70.3 billion dollars.

We’re going to look for the line item under assets that says intangible assets and we can see that intangible assets as of last year are $5.4 billion. We’re going to subtract that from the $70 billion dollars of book value. We’re also looking to see if we have cost in excess and we do not. Those are the two items. They’re usually side by side on the balance sheet assets. You can see them together, but there’s nothing there for Goldman Sachs. That’s where we got our numbers and where we get our per share numbers are right here at the very bottom of that. Divide 485 million into the net of $70 billion equity minus the intangibles and you get $134 dollars per share.


Why is that kind of interesting? As of the day I’m doing this, Goldman is selling for $144.45 per share. Let’s go back and take a look at this for the last year, you can see at one point Goldman was selling for $90 dollars a share and that’s when we were buying. It was a phenomenal deal, if you like the idea of buying a company substantially below its tangible book value per share. That’s one more way we can get at the value of a business and whether we have a margin of safety or not.  Now your homework.

  1. Go to the Rule #1 Toolbox
  2. Enter the symbol of your big moat company, the one you’ve been working on.
  3. Click on the balance sheet.
  4. Find the zombie value, subtract the intangibles and cost in excess from equity. Then divide by the number of shares and you get the zombie value per share.
  5. Then ask yourself is the zombie value per share more or less than the stock price.

If this is a reasonably wonderful company and it would be, or you wouldn’t be looking at it and you can buy this thing for less than the zombie value, that’s a heck of a deal. That’s like a depression era deal.



Phil Town is an investment advisor, hedge fund manager, 3x NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.