When you see goodwill on a balance sheet, how is it analyzed with regard to a company's financial strength? I guess when one sees impairments of goodwill it would generally indicate poor company performance broadly, but are there a few rules used to analyze goodwill among finance practitioners? Is it generally excluded in analysis? Does one typically need to investigate impairments and impairment trends to understand if it's really a negative? And so on.
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goodwill is the excess you pay for acquisition over and above the value of tangible assets of the target so we are basically talking stuff like control premium, brand value, access to intellectual property owned, etc..
If goodwill is written down significantly and frequently it probably means the acquisitions are results of management ego and no tangible business reasons..
Yeah, I understand what goodwill is. I'm trying to understand how one might interpret a balance sheet when looking at a company for the first time. Take facebook, for example, which has almost $18 billion in goodwill. How does one adjust a balance sheet to account for this "non-real" asset? Does one just eliminate it from the balance sheet during analysis? If I look at Facebook's balance sheet for the first time and I see $18 billion of goodwill, is it a number I completely ignore or does it reveal a relevant story or offer interesting insights? If one were to remove goodwill from the analysis, the analyst would find that facebook has negative equity.
I don't think just looking at that number alone really means much.. in the facebook case, I would also look into companies acquisition rate, time it takes for acquisitions to turn a profit, how well facebook has "synergized" with these acquisitions, etc. to add color to that number..
Your question doesn't make any sense. Are you looking at the BS from the perspective of an investor? If so, are you looking at this from a debt or equity investment perpsective. If Debt, a lender would be a complete fool to look at goodwill on the BS since they are not tangible assets against which any loan would be made. If from an equity perspective, your focus is more on the EBITDA and cash flows of the business coupled with the long-term growth rates in FCF to equity to compute an IRR based on your desired hold period. You could take goodwill into account there to the extent you want to factor in an impairment charge, but you would have to really know what the goodwill is tied to. For ex, the $1BB Instagram purchase may contain goodwill of $500MM after a write up $500MM to the asset side of the BS. If Instagram is indeed worth $35BB today, are you going to say from an investor perspective the $500MM goodwill is not Accretive to the BS and facebook's overall enterprise value?
Not from a lender's standpoint.
you get tax credit when it decreases! LOL =D
Yeah, I read up on this a few hours ago. Only the IRS could possibly make this a more complicated subject. Reading the IRS code on this is like reading Greek. The author explaining the IRS code (basically, the Rosetta Stone) said that the IRS actually has no hard-and-fast standard on whether or not an organization can write off impairments of goodwill on their taxes, so my assumption is that most companies do take the write-off.
lmao! probably cause they dont want anyone to have a tax break.
I've done a goodwill analysis for an old PE-backer at my older company. This was from my perspective at a private company going through restructuring.
Impairment analysis typically happens to a company if an auditor proceeds to "call-out" a company's post-money valuation after an injection of capital. The injection increases the value of the company, but an auditor may notice no historical increase in cash flow or notice a historical decrease in EBITDA, and ask for the company to perform a self-valuation exercise.
Because cash flow translates to tangible asset value on the balance sheet, a DCF is performed. If the implied equity value from the DCF exceeds the future value of net identifiable assets (total assets - total liabilities), the IEV stands to solidify the goodwill position. If vice versa, a write off must be taken on the income statement and balance sheet.
Only in the event of an acquisition can there be an accretion to goodwill, just because IEV > FV of NIA doesn't mean that the company should receive any additional intangible value to the balance sheet.
Companies like @"socola2003" mentioned may never see a goodwill impairment exercise because even though they've seen heavy premiums to their multiples and command high valuations to tangible book, their slight increases in profitability save judgement on warranting a deep dive to goodwill.
Very interesting. Thanks for that.
I wonder how Facebook is justifying its goodwill position to auditors. It's an outrageous percentage of their book value.
Yeah I agree, overly inflated.... The lack of 3rd-party justification is probably because no institutional investor plans on becoming a majority stakeholder.
If I called out an impairment justification just so that I could get a cheaper price point for heavy ownership entry, I'd be scrutinized by the hundreds of other powerful investors who don't want their capital gains to take a dive.
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