Goodwill and ROIC

[Jefferybic]

So accounting Goodwill is basically the difference between market price paid for a company and the book value of it's assets. Sort of like an over payment item listed under assets on the balance sheet.

When you think of Buffett he has made all his billions mostly from economic goodwill not shown on the balance sheets - brand names etc, that have actually grown significantly in value over the years, rather than shrunk. Hence he ignores amortization of goodwill. Alot of them are businesses that operate with very little in the way of tangible assets, where in many cases a small increase in hard assets increases returns dramatically.
Also a company trading under book value is generally not likely to have much in the way of a competitive advantage. In a way, you could say that if a company makes an acquisition of another at a price of it's book value it is likely to be decreasing shareholder returns/value.

[JOHNNY]

Posts: 88
I think it all goes back to earnings power. A company with earnings power is valued as a living company much beyond book value, with likely a strong brand. A dying company is valued likely under book value, due to burning capital.

A lot of high growth companies with negative income may have huge earnings power. When they stop investing in growth, they may unlock earnings.

Earnings or potential earnings is used as future value discounted back to the present.
Balance sheet is used as present value, and for good businesses, I consider goodwill at 50% of its value because after acquiring a new business, there is some synergistic value, but I just assume they've always overpaid for them.

[JosephLet]

This is a tough one because the majority of companies don't fall into the Buffett style category and so they've overpaid just for the sake of acquiring the business.

So if a general broad thumb is used, I prefer to ignore it first.

However, if something looks good, companies will sometimes detail what the goodwill is. The goodwill due to a long and large customer list is valuable because there is a cost associated with customer acquistion.

However, if a bigger company already has most of those customers to begin with and just wants to buy out a smaller company to dismantle and kill it, then there's no real value there.