Author: Ben Tewey
Published: 2/14/21

A Case Study on Intangible Assets

If I asked you the value of the Coca-Cola brand, that red bottle, the syrupy soft drink, the polar bears relaxing with Santa– a brand synonymous with happiness and good memories, what dollar sign value would you place on it? $600 million? $1 billion? $2 billion? Coke’s management says $5. Now what if I asked about the F&M Schaefer Brewing Company, you know Shaeffer’s and their famous motto right? “Shaefer’s is the one beer to have when you are having more than one.” Right? No? Oh, well they claimed this was worth 40 million dollars in intangible assets on their balance sheet.

An Explanation of Intangible Assets

Intangible assets are, “those which cannot be touched, weighed, or measured,” to use the words of Benjamin Graham. Examples of intangible assets include: patents, trademarks, sphere of mind, brand recognition, a secret formula, goodwill, intellectual property or copyrights. At VestRule, we disregard intangible assets due to their subjectivity and remarkable tendency to be wildly over or understated as exemplified by the case study above. We will always prefer conservative management that either does not mention intangibles or wildly understates them to aggressive accounting practices that mark up this line item.

Their Usefulness to the Investor

There is a rather funny tendency for the best enterprises with the strongest intangible assets to ignore them altogether and not list them at all on their balance sheet or write them as a $1 asset, while the weaker enterprises or less financially stable ones will egregiously overstate their intangibles. It is true, indeed, that intangible assets play an important role in a company’s competitive moat, but due to their subjectivity we will disregard them. We feel the investor should give no weight to this line item on the balance sheet, and that time is better spent measuring intangibles through their earnings power on the income statement, rather than their balance sheet valuation.  

Disclosure

Ideas for this article come from Benjamin Graham’s Interpretation of Financial Statements and the YouTube Channel Swedish Investor who brilliantly summarized the reading in his video “5 Takeaways from The Interpretation of Financial Statements.” I am not a financial advisor. These articles are for educational purposes only. Investing of any kind involves risk. Your investments are solely your responsibility and we do not provide personalized investment advice. It is crucial that you conduct your own research. I am merely sharing my opinion with no guarantee of gains or losses on investments. Please consult your financial or tax professional prior to making an investment.