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Intangible Assets: A Hidden but Crucial Driver of Company Value

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Intangible Assets: A Hidden but Crucial Driver of Company Value

valuing intangible assets

Intangible Assets Take Center Stage

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In 2018, intangible assets for S&P 500 companies hit a record value of $21 trillion. These assets, which are not physical in nature and include things like intellectual property, have rapidly risen in importance compared to tangible assets like cash.

Today’s infographic from Raconteur highlights the growth of intangible asset valuations, and how senior decision-makers view intangibles when making investment decisions.

Tracking the Growth of Intangibles

Intangibles used to play a much smaller role than they do now, with physical assets comprising the majority of value for most enterprise companies. However, an increasingly competitive and digital economy has placed the focus on things like intellectual property, as companies race to out-innovate one another.

To measure this historical shift, Aon and the Ponemon Institute analyzed the value of intangible and tangible assets over nearly four and a half decades on the S&P 500. Here’s how they stack up:

Intangible vs. Tangible Assets

Source: Aon

In just 43 years, intangibles have evolved from a supporting asset into a major consideration for investors – today, they make up 84% of all enterprise value on the S&P 500, a massive increase from just 17% in 1975.

The Largest Companies by Intangible Value

Digital-centric sectors, such as internet & software and technology & IT, are heavily reliant on intangible assets.

Brand Finance, which produces an annual ranking of companies based on intangible value, has companies in these sectors taking the top five spots on the 2019 edition of their report.

RankCompanySectorTotal Intangible ValueShare of Enterprise Value
1MicrosoftInternet & Software$904B90%
2AmazonInternet & Software$839B93%
3AppleTechnology & IT$675B77%
4AlphabetInternet & Software$521B65%
5FacebookInternet & Software$409B79%
6AT&TTelecoms$371B84%
7TencentInternet & Software$365B88%
8Johnson & JohnsonPharma$361B101%
9VisaBanking$348B100%
10AlibabaInternet & Software$344B86%
11NestleFood$313B89%
12Procter & GambleCosmetics & Personal Care$305B101%
13Anheuser-Busch InBevBeers$304B99%
14VerizonTelecoms$300B83%
15ComcastMedia$276B92%
16MastercardBanking$259B99%
17NovartisPharma$252B101%
18WalmartRetail$252B68%
19UnitedhealthHealthcare$245B94%
20PfizerPharma$235B98%

Note: Percentages may exceed 100% due to rounding.

Microsoft overtook Amazon for the top spot in the ranking for 2019, with $904B in intangible assets. The company has the largest commercial cloud business in the world.

Pharma and healthcare companies are also prominent on the list, comprising four of the top 20. Their intangible value is largely driven by patents, as well as mergers and acquisitions. Johnson & Johnson, for example, reported $32B in patents and trademarks in their latest annual report.

A Lack of Disclosure

It’s important to note that Brand Finance’s ranking is based on both disclosed intangibles—those that are reported on a company’s balance sheet—and undisclosed intangibles. In the ranking, undisclosed intangibles were calculated as the difference between a company’s market value and book value.

The majority of intangibles are not reported on balance sheets because accounting standards do not recognize them until a transaction has occurred to support their value. While many accounting managers see this as a prudent measure to stop unsubstantiated asset values, it means that many highly valuable intangibles never appear in financial reporting. In fact, 34% of the total worth of the world’s publicly traded companies is made up of undisclosed value.

“It is time for CEOs, CFOs, and CMOs to start a long overdue reporting revolution.”

—David Haigh, CEO of Brand Finance

Brand Finance believes that companies should regularly value each intangible asset, including the key assumptions management made when deriving their value. This information would be extremely useful for managers, investors, and other stakeholders.

A Key Consideration

Investment professionals certainly agree on the importance of intangibles. In a survey of institutional investors by Columbia Threadneedle, it was found that 95% agreed that intangible assets contain crucial information about the future strength of a company’s business model.

Moreover, 98% agree that more transparency would be beneficial to their assessment of intangible assets. In the absence of robust reporting, Columbia Threadneedle believes active managers are well equipped to understand intangible asset values due to their access to management, relationships with key opinion leaders, and deep industry expertise.

By undertaking rigorous analysis, managers may uncover hidden competitive advantages—and generate higher potential returns in the process.

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Shapes of Recovery: When Will the Global Economy Bounce Back?

Economic recovery from COVID-19 could come in four shapes—L, U, W, and V. What do they mean, and what do global CEOs see as the most likely?

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The Shape of Economic Recovery, According to CEOs

Is the glass half full, or half empty?

Whenever the economy is put through the ringer, levels of optimism and pessimism about its potential recovery can vary greatly. The current state mid-pandemic is no exception.

This graphic first details the various shapes that economic recovery can take, and what they mean. We then dive into which of the four scenarios are perceived the most likely to occur, based on predictions made by CEOs from around the world.

The ABCs of Economic Recovery

Economic recovery comes in four distinct shapes—L, U, W, and V. Here’s what each of these are characterized by, and how long they typically last.

  • L-shape
    This scenario exhibits a sharp decline in the economy, followed by a slow recovery period. It’s often punctuated by persistent unemployment, taking several years to recoup back to previous levels.
  • U-shape
    Also referred to as the “Nike Swoosh” recovery, in this scenario the economy stagnates for a few quarters and up to two years, before experiencing a relatively healthy rise back to its previous peak.
  • W-shape
    This scenario offers a tempting promise of recovery, dips back into a sharp decline, and then finally enters the full recovery period of up to two years. This is also known as a “double-dip recession“, similar to what was seen in the early 1980s.
  • V-shape
    In this best-case scenario, the sharp decline in the economy is quickly and immediately followed by a rapid recovery back to its previous peak in less than a year, bolstered especially by economic measures and strong consumer spending.

Another scenario not covered here is the Z-shape, defined by a boom after pent-up demand. However, it doesn’t quite make the cut for the present pandemic situation, as it’s considered even more optimistic than a V-shaped recovery.

Depending on who you ask, the sentiments about a post-pandemic recovery differ greatly. So which of these potential scenarios are we really dealing with?

How CEOs Think The Economy Could Recover

The think tank The Conference Board surveyed over 600 CEOs worldwide, to uncover how they feel about the likelihood of each recovery shape playing out in the near future.

The average CEO felt that economic recovery will follow a U-shaped trajectory (42%), eventually exhibiting a slow recovery coming out of Q3 of 2020—a moderately optimistic view.

However, geography seems to play a part in these CEO estimates of how rapidly things might revert back to “normal”. Over half of European CEOs (55%) project a U-shaped recovery, which is significantly higher than the global average. This could be because recent COVID-19 hotspots have mostly shifted to other areas outside of the continent, such as the U.S., India, and Brazil.

Here’s how responses vary by region:

RegionL-shapeU-shapeW-shapeV-shape
Global (N=606)32%42%16%11%
U.S. (N=103)26%42%23%9%
Europe (N=110)29%55%12%4%
China (N=122)25%43%11%21%
Japan (N=95)49%26%23%1%
Gulf Region (N=16)57%26%17%-

In the U.S. and Japan, 23% of CEOs expect a second contraction to occur, meaning that economic activity could undergo a W-shape recovery. Both countries have experienced quite the hit, but there are stark differences in their resultant unemployment rates—15% at its peak in the U.S., but a mere 2.6% in Japan.

In China, 21% of CEOs—or one in five—anticipate a quick, V-shaped recovery. This is the most optimistic outlook of any region, and with good reason. Although economic growth contracted by 6.8% in the first quarter, China has bounced back to a 3.2% growth rate in the second quarter.

Finally, Gulf Region CEOs feel the most pessimistic about potential economic recovery. In the face of an oil shock, 57% predict the economy will see an L-shaped recovery that could result in depression-style stagnation in years to come.

The Economic Recovery, According to Risk Analysts

At the end of the day, CEO opinions are all over the map on the potential shape of the economic recovery—and this variance likely stems from geography, cultural biases, and of course the status of their own individual countries and industries.

Despite this, portions of all cohorts saw some possibility of an extended and drawn-out recovery. Earlier in the year, risk analysts surveyed by the World Economic Forum had similar thoughts, projecting a prolonged recession as the top risk of the post-COVID fallout.

It remains to be seen whether this will ultimately indeed be the trajectory we’re in store for.

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The $88 Trillion World Economy in One Chart

The world’s total GDP crested $88 trillion in 2019—but how are the current COVID-19 economic contractions affecting its future outlook?

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The $88 Trillion World Economy in One Chart

The global economy can seem like an abstract concept, yet it influences our everyday lives in both obvious and subtle ways. Nowhere is this clearer than in the current economic state amid the throes of the pandemic.

This voronoi-style visualization from HowMuch relies on gross domestic product (GDP) data from the World Bank to paint a picture of the global economy—which crested $87.8 trillion in 2019.

Editor’s note: Annual data on economic output is a lagging indicator, and is released the following year by organizations such as the World Bank. The figures in this diagram provide a snapshot of the global economy in 2019, but do not necessarily represent the impact of recent developments such as COVID-19.

Top 10 Countries by GDP (2019)

In the one-year period since the last release of official data in 2018, the global economy grew approximately $2 trillion in size—or about 2.3%.

The United States continues to have the top GDP, accounting for nearly one-quarter of the world economy. China also continued to grow its share of global GDP, going from 15.9% to 16.3%.

RankCountryGDP% of Global GDP
#1🇺🇸 U.S.$21.4T24.4%
#2🇨🇳 China$14.3T16.3%
#3🇯🇵 Japan$5.1T5.8%
#4🇩🇪 Germany$3.9T4.4%
#5🇮🇳 India$2.9T3.3%
#6🇬🇧 UK$2.8T3.2%
#7🇫🇷 France$2.7T3.1%
#8🇮🇹 Italy$2.0T2.3%
#9🇧🇷 Brazil$1.8T2.1%
#10🇨🇦 Canada$1.7T2.0%
Top 10 Countries$58.7 trillion66.9%

In recent years, the Indian economy has continued to have an upward trajectory—now pulling ahead of both the UK and France—to become one of the world’s top five economies.

In aggregate, these top 10 countries combine for over two-thirds of total global GDP.

2020 Economic Contractions

So far this year, multiple countries have experienced temporary economic contractions, including many of the top 10 countries listed above.

The following interactive chart from Our World in Data helps to give us some perspective on this turbulence, comparing Q2 economic figures against those from the same quarter last year.

One of the hardest hit economies has been Peru. The Latin American country, which is about the 50th largest in terms of GDP globally, saw its economy contract by 30.2% in Q2 despite efforts to curb the virus early.

Spain and the UK are also feeling the impact, posting quarterly GDP numbers that are 22.1% and 21.7% smaller respectively.

Meanwhile, Taiwan and South Korea are two countries that may have done the best at weathering the COVID-19 storm. Both saw minuscule contractions in a quarter where the global economy seemed to grind to a halt.

Projections Going Forward

According to the World Bank, the global economy could ultimately shrink 5.2% in 2020—the deepest cut since WWII.

See below for World Bank projections on GDP in 2020 for when the dust settles, as well as the subsequent potential for recovery in 2021.

Country/ Region / Economy Type2020 Growth Projection2021E Rebound Forecast
United States-6.1%4.0%
Euro Area-9.1%4.5%
Advanced economies-7.0%3.9%
Emerging economies-2.5%4.6%
East Asia and Pacific-0.5%6.6%
Europe and Central Asia-4.7%3.6%
Latin America and the Caribbean-7.2%2.8%
Middle East and North Africa-4.2%2.3%
South Asia-2.7%2.8%
Sub-Saharan Africa-2.8%3.1%
Global Growth-5.2%4.2%

Source: World Bank Global Economic Prospects, released June 2020

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