What is the Goodwill To Assets Ratio
Goodwill to assets ratio is a ratio that measures how much goodwill a company is recording compared to the total level of its assets. When understanding the significance of this ratio it is important to remember that goodwill is an intangible asset. Essentially, the goodwill to assets ratio is a way to see what percentage of a company's assets are intangible versus tangible. Goodwill to assets is calculated as:
Goodwill To Assets = Unamortized Goodwill / Total Assets
BREAKING DOWN Goodwill To Assets Ratio
A smaller goodwill to assets ratio will indicate that a large portion of a firm's total assets is comprised of tangible assets, or material items the company can sell for monetary value. Intangible assets are not easily separated from the company or liquidated for monetary gain. In addition, the amount of goodwill a company maintains can be changed quickly if the company decides to write down the amount of goodwill they have on the books. A company with a large starting goodwill to assets ratio may experience a significant swing in the value of their total assets — and overall company valuation — if they write down a large portion of their goodwill when their asset base was heavily composed of goodwill to begin with.
The average goodwill to assets ratio varies from industry to industry. It is best to compare goodwill to assets ratios within industries to get a feeling for what is typical. Then, industry outliers can be identified. Goodwill is often generated as the result of an acquisition. If this ratio starts to increase rapidly, it can indicate the company is on a buying spree. If a company is increasing its total assets by acquiring other companies and goodwill is an increasingly large portion of the newly formed company's assets it could potentially lead to future asset-level instability for the newly formed company.