I was just reading a UBS research report on European companies.
For some pretty big name companies, more than 50% of their assets are intangible (goodwill, trademarks, mastheads, etc.).
With the international accounting standands, some companies may be at risk of large write downs of these assets if the economic problems in the US and elsewhere start to impact their profits. While intangibles are given an indefinite life, companies need to review the carrying value of intangibles periodically. That’s where the risk lies.
Danone had 62% of its assets in intangibles. Cadbury Schwepes 56% and Vodafone 55%.
For Danone, most of the goodwill was added during 2007 due to M&A transactions.
There are also a number of European companies with intangibles larger than their market cap! Telecom Italia, RBS Group & Deutsche Telekom are examples.
Vodafone’s intangibles are 83% of its market cap.
Its widely recognized that intangible assets / factors are extremely important to the competitive advantage of a business. Goodwill forms a very large % of the intangible assets of these firms.
I have not looked at intangibles as a % of listed companies in other countries but I suspect there will be similar household names with similar %’s.
This isn’t a bad thing but with accounting standards today there might be some big write down’s of intangible assets.
This post is just an observation. I knew intangibles are now a huge part of many balance sheets but its worth watching your investments in companies with substantial intangibles in the balance sheet. They will need to keep delivering cash flow and profit growth to avoid the risk of potential write downs of their goodwill and other intangibles.
Cheers
Tom
Tags: Goodwill, Intangible Assets, Europe, Vodafone, Telecom Italia, Deutsche Telekom, write downs, European companies
