Quote:
Originally Posted by bills217
Um, Benjamin Graham would have never assigned any value whatsoever to goodwill or any other intangible asset.
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O RLY?
Graham did however acknowledge ... intangibles were just as much an asset as tangibles, assuming of course that a proper value could be determined. They could, in some situations, even be superior assets.
‘Earnings based on these intangibles [e.g. goodwill] may be even less vulnerable to competition than those which require only a cash investment in productive facilities.
'Furthermore, when conditions are favorable, the enterprise with the relatively small capital investment is likely to show a more rapid rate of growth.
Ordinarily it can expand its sales and profits at slight expense and therefore more rapidly and profitably for its stockholders than a business requiring a large plant investment per dollar of sales." ~ B. Graham
To think that Graham would have assigned no value to the brand of Coca-Cola boggles the mind.
Using an analogy, one of the favorite examples of Warren Buffett, take two separate companies. Company A has a net worth of $100,000, $40,000 of which is net tangible assets and $60,000 of which is intangible (brand name, goodwill, patents etc). Company B has the same net worth but $90,000 its assets are tangible. Each company earns $10,000 a year.
So Company A is earning $10,000 from tangible assets of $40,000 and Company B is earning $10,000 from tangible assets of $90,000.
If both companies wanted to double earnings, they might have to double their investment in tangible assets. For Company A to do this, it would have to spend $40,000 to add $10,000 of earnings. For Company B to do this, it would have to spend another $90,000 to add $10,000 to earnings.
All other things being equal, Company A would have better future prospects of increase in real earnings than Company B. [Cf. Coke, Coach, LVMH, et al]
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