Valuation Question - Have some trouble valuing a few BS items on this company
Hey guys, I'm having some trouble valuing a few balance sheet items on this company.
How do you guys generally value intangible assets (goodwill, patents, etc.) and non-operating assets to get to total enterprise value?
For cash and marketable securities, I just use the book value since it is already reported at fair market value.
But what about other non-operating assets like illiquid investments and non-consolidated subsidiaries?
Also, how should I treat goodwill and other intangible assets on the balance sheet? I always assumed goodwill just to be a "plug" number and did not include it in my valuation.
This company has a shitload of reported goodwill.
Well, someone here can correct me if I'm wrong, but if you're talking about a plain vanilla DCF valuation, I don't see why you need to value goodwill/intangibles separately. Unless you work in a Big 4 and are doing goodwill/intangibles valuation for reporting purposes (FAS 141/142).
Now, in terms of modeling these 2 items: - Goodwill: straightline throughout the projection period. No way to project goodwill from new acquisitions for future years. - Intangibles: amortise throughout projection period and assume additions depending on the situation (tech companies with internally generated intangibles, for example).
In relation to non-operating assets, such as illiquid investments and non-consolidated subsidiaries, you can do the following: - If these non-consolidated subs are public companies, simply assume market value; if not, which represents most of the cases, value them using public / transaction comps; don't bother doing DCF for them. - Illiquid investments... well, if it is illiquid it means that there is no active market for them, in that case, and assuming they might be immaterial, I would use book value for them - in this case, it seems the best thing you have.
Hope this helps.
Thanks lui.
But why do we even bother including goodwill in our valuation, and more specifically, our ROIC calculation?
Goodwill doesn't generate any cash flows and is only an accounting plug number. How does it add value to the company?
I'm looking at a ROIC table which has "investments in goodwill" line item (for the FCF portion) and a "acquired goodwill + cumulative amortization and pooled goodwill" line item (for the IC portion).
I've just never dealt with goodwill before... never considered it to be a FCF component or a value adding component to a company (except as a plug number for M&A and LBO).
Can you help me understand this better?
Thanks man
Goodwill is nothing but a plug number and it gets tested for impairment annually, so you know its not worth less than whats on the books. Simply use the value of goodwill that is on the books for your purposes. Soon under new IFRS standards, companies will need to step-up the value as well as test for impairment, but that is 5-years out.
Goodwill is nothing but a plug number and it gets tested for impairment annually, so you know its not worth less than whats on the books. Simply use the value of goodwill that is on the books for your purposes. Soon under new IFRS standards, companies will need to step-up the value as well as test for impairment, but that is 5-years out.
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