Originally Posted by bills217
Um, Benjamin Graham would have never assigned any value whatsoever to goodwill or any other intangible asset.
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]