What Assets Really Contribute to Business Value?

With all the scrutiny that public companies get these days, you would think there's not much that isn’t known about them. But what we know may only scratch the surface of what comprises their true enterprise value.

Beneath all the readily available data on a company’s “traditional” assets such as cash, inventory levels, buildings, machinery and capital investment lies a mountain of information about such things as R&D, brands, trademarks, patents and trade secrets that traditional accounting methods don't capture. These are a company’s intangible assets – the ones you can’t touch or feel.  

Today, the market value of S&P 500 companies is about nine times what's on their books. Some of this value gap is the result of market expectations about the company’s future performance. But it’s safe to assume that the market value of these companies is still many times book value. 

What’s creating this huge gap between book value and market value? It’s the intangible assets that are driving innovation, performance and ultimately, enterprise value.

As Baruch Lev, Philip Bardes Professor of Accounting and Finance at NYU, said, “Intangible assets are the only assets that create value.” How well do you understand the intangible value that determine the value of your company?