# Placing a Value on Intangible Assets

Intangible assets are often one of the most valuable things that companies have in their possession. These assets can be very difficult for investors to put a value on. Here are a few things to consider about intangible assets and how you can place a value on them.

Intangible Assets

There are many different things that could fall into the category of intangible assets. These assets are something that you cannot necessarily put a hand on, but they do add value to a company. For example, one of the biggest sources of intangible assets is human capital. You cannot necessarily see the ideas that are in a persons head, but they definitely can add value to a company. If you took the founder or the CEO away from many companies, those companies would become worthless. Therefore, you have to look at these intangible assets when you are valuing a company.

In recent years, intangible assets have played a vital role in the market place. People are getting away from strict fundamental analysis and putting more value in the intangible assets of a company. For example, you will see companies that are going through an initial public offering and their stock price is through the roof. They do not have any earnings yet to look at, but investors are still willing to put up big money to get involved with them.

Valuing

It can be difficult to put an actual value on intangible assets. This process is unique for everyone and there is a lot of room for interpretation. One metric that is commonly used is the calculated intangible value or CIV. This process attempts to single out the intangible value from the tangible assets.

In order to do this, start out by calculating the average pre-tax earnings over a three year period for the company. Then do the same thing with the tangible assets for the last three years. Divide the earnings by the assets to get the return on assets. Compare that number to the industry average. Multiply the industry average ROA by the tangible assets of your company. Subtract this number from the pre-tax earnings in order to determine how much better this company is than the rest of the industry. Then determine the average income tax rate and multiply it by the return. Subtract the taxes from the amount of money that you came up with earlier to get the after-tax income difference.

Then you will divide this number by a discount rate. When you do this, you should be able to come up with an approximate value for the intangible assets.

What This Means to Investors

If you are an investor, you want to find a company that is high on intangible assets. While it is nice to invest in a company that has a lot of tangible assets as well, intangible assets tend to lead to innovation. This could potentially bring you a nice return on your investment over the long-term.