07
/ May
2012
Investors need to investigate intangible assets ratios in due diligence
Rex Moore of the Motley Fool, in writing about The Altria Group, adopts Hewitt Heiserman’s intangible assets ratio of 20% of total assets as a threshold for investors (presented in It's Earnings That Count). Heiserman views anything over 20% as worrisome, "because management might be overpaying for the acquisition or acquisitions that gave rise to the goodwill."
This is a severely conservative threshold, especially for acquisition-bent and technology companies. In the purchase price acquisition survey to be released by BVR in early summer, the average company had Goodwill at 35% of total assets, and total intangibles at 72% of total assets. Mark-to-market surveys of the S&P 500 put the ratio still higher.