As businesses shift away from manufacturing, the value of intangible assets such as brand recognition, distribution systems and market position is increasingly important to measure. A new white paper from Professor Stephen Penman and the Center for Excellence in Accounting and Security Analysis provides new insight for firms trying to do just this.
Penman’s work, recently featured in Columbia Ideas at Work, demonstrates that the value of intangible assets can be deciphered by looking at a firm’s income statement. The first clue lies in the firm’s market-to-book ratio; a ratio of more than six indicates that the market has assigned a lot of assets that are missing from the balance sheet.
In 2008, Microsoft’s book value was $36.3 billion, while its shares were trading at $25, for a total value of $228.8 billion. … Microsoft’s income statement reported a net income of $17.7 billion for 2008. Using information from the income statement, Penman employed a simple residual earnings valuation technique to calculate the equity value of expected earnings for 2009, arriving at a share price of $23.03 — much closer to Microsoft’s share price of $25 at the time than a look at the balance sheet (absent market share, intangible R&D assets or brand) would suggest.
Penman is careful to point out that intangible assets do not operate alone — but rather in symphony with other more established assets. Take the story of Coca-Cola, for example, he says.
“Coca-Cola’s value comes not just from the brand it created, but how the brand works in combination with its distribution system. The brand is an intangible working together with other intangible ideas about how to get value from customers. What if Coke sold off its brand? All the other intangible assets, like its distribution systems, and even tangible assets such as bottling facilities — would be worth far, far less than they are with the brand intact,” Penman says. “You cannot isolate the value of individual intangibles.”
Photo credit: Anssi Koskinen