What is Goodwill to Assets Ratio?
Goodwill to assets ratio is a financial metric that measures the proportion of a company’s goodwill, which is an intangible asset, to its total assets. Goodwill is the excess amount that a company pays to acquire another company over its net identifiable assets. Goodwill represents the value of the acquired company’s brand name, customer base, employee relations, and other intangible factors that are not reflected in its balance sheet.
Goodwill to assets ratio is used to evaluate how much of a company’s value is derived from its goodwill, and how much is derived from its tangible assets. A high goodwill to assets ratio indicates that a large portion of a company’s value is based on its intangible assets, which may be more difficult to measure and more vulnerable to impairment. A low goodwill to assets ratio indicates that a large portion of a company’s value is based on its tangible assets, which may be more easily valued and more stable.
How to Calculate Goodwill to Assets Ratio?
Goodwill to assets ratio can be calculated by dividing the goodwill by the total assets of a company. The formula is:
Goodwill to Assets Ratio = Goodwill / Total Assets
Goodwill can be found on the balance sheet of a company, usually under the non-current assets section. Total assets can also be found on the balance sheet, as the sum of current and non-current assets.
How to Calculate Goodwill to Assets Ratio in Excel?
To calculate goodwill to assets ratio in excel, we need to have the data of goodwill and total assets of a company in separate cells. For example, let’s assume that we have the following data in cells A1 and B1:
| Goodwill | Total Assets |
|---|---|
| 20 | 100 |
To calculate the goodwill to assets ratio, we can use the following formula in cell C1:
=A1/B1
This will give us the result of 0.2, which means that the goodwill to assets ratio is 20%.
Example of Goodwill to Assets Ratio
Let’s look at an example of how to use goodwill to assets ratio to compare two companies in the same industry. Suppose we have the following data for Company A and Company B:
| Company | Goodwill | Total Assets |
|---|---|---|
| A | 50 | 200 |
| B | 40 | 150 |
To calculate the goodwill to assets ratio for each company, we can use the same formula as before:
=Goodwill/Total Assets
For Company A, the formula will be:
=50/200
This will give us the result of 0.25, which means that the goodwill to assets ratio for Company A is 25%.
For Company B, the formula will be:
=40/150
This will give us the result of 0.2667, which means that the goodwill to assets ratio for Company B is 26.67%.
Interpretation of Goodwill to Assets Ratio
By comparing the goodwill to assets ratio of Company A and Company B, we can see that Company B has a higher ratio than Company A. This means that Company B has more goodwill relative to its total assets than Company A. This could imply that Company B has paid more to acquire other companies, or that it has a stronger brand name, customer loyalty, or other intangible factors that increase its value. However, it could also mean that Company B has a higher risk of goodwill impairment, which could reduce its earnings and value in the future.
Therefore, goodwill to assets ratio should not be used in isolation, but rather in conjunction with other financial ratios and indicators, such as return on assets, earnings per share, price to earnings ratio, and industry benchmarks. Goodwill to assets ratio can provide useful insights into the sources and sustainability of a company’s value, but it should also be interpreted with caution and context.
Other Approaches to Calculate Goodwill to Assets Ratio
There are other approaches to calculate goodwill to assets ratio, depending on the data available and the purpose of the analysis. For example, some analysts may prefer to use the book value of equity instead of total assets, as it excludes the effect of debt on the company’s value. The formula for this approach is:
Goodwill to Equity Ratio = Goodwill / Book Value of Equity
Another approach is to use the market value of equity instead of total assets, as it reflects the current value of the company in the market. The formula for this approach is:
Goodwill to Market Value Ratio = Goodwill / Market Value of Equity
Both of these approaches can provide different perspectives on the goodwill to assets ratio, and may be more suitable for certain situations. However, they also have their own limitations and assumptions, and should be used with care and comparison.
