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TANGIBLE VS. INTANGIBLE ASSETS

PREPARED BY: Chris Stanford 

DATE:9/15/23

Many of us grasp the concept of assets quite easily – envisioning tangible assets such as manufacturing facilities, cash-filled bank accounts, or warehouses stocked with inventory. However, what often perplexes investors is the idea that brand perception is also an asset with an assigned value on a balance sheet; this is known as an intangible asset. In contrast, the tangible assets I mentioned earlier are, as the name suggests, physical assets, excluding copyrights, trademarks, patents, and brand value.

One important metric I examine is the ratio of tangible to intangible assets, and it’s worth noting that accounting for these assets can be rather complex. As a beginner analyzing financial statements, it’s advisable to initially focus on tangible assets when determining a company’s valuation. This approach helps maintain a more reasonable estimate of the company’s price target. Personally, I prefer companies with a substantial proportion of tangible assets relative to intangible ones.

Intangible assets pose challenges not only in terms of valuation but also in their utility for covering expenses. These assets are typically considered essential and are retained by the company unless there are significant issues. In essence, they are core assets that are not readily convertible into cash to meet day-to-day obligations.

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