Wednesday, July 23, 2008

Its all in the Notes: Intangibles

Today, as I was reading through another annual report (I like to think of it as mining for gold) I came across a balance sheet that included $4.78M in goodwill and $1.71M of intangible assets. For larger sized companies this may not represent a significant portion of the assets, but the company I was perusing only had a market cap of around $30M, so this was material to the balance sheet.

I guess if you read as many annual reports as Saj and I have in the past few months you get hungry for some excitement! So to quench this desire, I decided to skip directly to the note disclosure on goodwill and intangibles! The interesting part between these items ended up residing with the disclosure on intangibles. Here is what I found:

As you can see from these line items, the most significant portion of the intangibles is from customer relations! I don't see this very often. Approximately 67% of the total intangibles cost was from customer relations. Since the net intangible figure was $1.709M, the customer relations value represented on the balance would be $1.15M (.67 x $1.709M).

For those value investors that like to calculate a net replacement value of assets, you might be estimating a value for customer relations from items on the income statement. The problem here is that if you fail to notice and back out the customer relations amount from the intangibles, you will be overvaluing the assets of the company by $1.15M.

As I mentioned here, its always a good idea to read through the notes when valuing a company as this note again illustrates.

1 comment:

Bootstrap said...

Nice post. Like you, after reading dozens of 10Ks and 10Qs. I find myself making a beeline for certain areas. Intangibles and Goodwill is a great area. Debt is another. Those two categories will provide the first test of weather a company has a value proposition or not.

Keep up the good work!