Goodwill is an invisible and valuable asset, such as a company's brand or technology. When you acquire a company, you pay for "goodwill" in addition to the assets owned by the acquired company. The price of "goodwill" paid at this time is recorded as an asset on the balance sheet. Therefore, "goodwill" is not recorded in all companies, but only in the company that made the acquisition.
In this column, we will explain the outline of goodwill, the reason for its occurrence, the analysis method, etc. in an easy-to-understand manner for stock beginners.
1. 1. What is goodwill?
Goodwill is an invisible and valuable asset, such as a company's brand or technology. It is recorded as a fixed asset on the balance sheet. Since it is an invisible asset, it is difficult to evaluate the amount of money, and it is not recorded as an asset just by running a company normally. However, when you buy a company, the amount of "goodwill" is added for the first time.
The reason is that the acquired company will not accept the acquisition unless the value of "goodwill" is evaluated correctly. Normally, when making an acquisition, the value of the company is determined by the "net assets" of the company. However, since goodwill is an asset that cannot be priced unless it is acquired or acquired, its net assets do not reflect the value of its brand power.
In other words, if you try to buy at the price of your net worth, you will buy at a lower price than the real value of the acquired company. It is better for the acquirer to buy it as high as possible, so this will not accept the acquisition. Therefore, we add an amount to the brand power, add it to the price of net assets, and acquire it. This "additional amount" is "goodwill".
In fact, let's take a look at the balance sheet of a company that is willing to buy. As an example, I would like to introduce Japan Tobacco (2914), which is famous for its nickname "JT". Japan Tobacco has acquired many overseas tobacco manufacturers as a stepping stone to overseas expansion. Therefore, as much as 2 trillion yen of “goodwill” is recorded as fixed assets (non-current assets in the case of the company) on the balance sheet.
2. Why goodwill occurs
When you buy a company, you must have a higher amount than your "net assets". Shareholders won't sell for the same amount as net worth.
Therefore, in order to complete the acquisition, it is necessary to add money to the net assets amount by plus alpha and convince the shareholders. The amount of plus alpha is calculated based on the brand power and technological power that generate profits for the company. There is such a transaction in the background of the acquisition, which causes goodwill.
If you compare goodwill to something familiar to you, is it buying and selling at Mercari? Suppose you have a limited quantity of products with a list price of 10,000 yen that you really wanted and couldn't get. When I searched for Mercari, it sold for 20,000 yen, and you bought it thinking that "it is worth buying even if you add 10,000 yen!".
This extra 10,000 yen is the value of the premium you find for that limited quantity product. Therefore, we consider the product to be an invisible value for accounting purposes and record it as a fixed asset on the balance sheet (strictly speaking, an intangible fixed asset).
3. 3. Goodwill risk
"Brand power and value of technology" is an asset that is difficult to monetize because it is an invisible asset unlike cash and buildings. Therefore, for accounting purposes, it is recorded as “intangible fixed assets” on the balance sheet.
Goodwill can also have a negative impact on a company's performance. Since it is an invisible asset, its value cannot be determined accurately. Therefore, after the acquisition, there may be a situation where "I thought the brand power was worth 10 billion yen, but in reality it was only 5 billion yen."
In the unlikely event that the value of goodwill is found to be low, 5 billion yen must be recorded as a loss. Of course, the profit of the company will be lost by 5 billion yen, so be careful.
Four. Let's check goodwill with a financial analysis tool
The existence of goodwill can be confirmed in the financial statements and securities reports, but it is difficult to grasp the size because it is written only in letters and numbers. But with GMO Click Securities' financial analysis tools, you can visually understand the size of goodwill! Anyone who opens an account can use the financial analysis tool for free.
Goodwill is included in the red frame of the image. It should be noted that not all are "goodwill", but since the intangible fixed assets in the red frame are 2.2 trillion yen and goodwill is 2 trillion yen, it can be considered that most of them are made of "goodwill". The checkpoint is the ratio of goodwill to net worth. The higher the share of goodwill in net worth, the lower the financial soundness.
In the case of Japan Tobacco, goodwill and net worth are about the same size. Therefore, in the unlikely event that the value of goodwill declines, the amount of goodwill must be recorded as an impairment loss. When this happens, almost all of your net worth disappears. Since net worth is shareholder money, impairment of goodwill may run out of shareholder money.
However, the risk that the “goodwill” of Japan Tobacco will be fully impaired is considered to be small. The reason is that Japan Tobacco has not made an unreasonable acquisition. In fact, Japan Tobacco has an in-house team dedicated to acquisitions, and they are looking for acquisition companies and estimating acquisition prices appropriately. Therefore, it is less likely that the value of goodwill will be misunderstood, and the risk of impairment is considered to be small.
Summary
Goodwill is an invisible and valuable asset, such as a company's brand or technology. Because it is an invisible asset, it can be difficult to value and overestimate its true value. If that happens, you will incur significant impairment losses, so you need to consider whether you are buying at the right price.
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