What is Goodwill in Investing?

A company’s real value may be in its “goodwill”—its brand, or the reputation and relationship it has built up with customers over the years.

A company’s “goodwill” value would only appear on the balance sheet if it was acquired rather than built up by the company’s operations.

Generally speaking, when one company acquires another as a going concern, it pays more than the value of the tangible assets that it acquires as part of its acquisition.

This excess of acquisition price over tangible-asset value is treated as “goodwill” on the buyer’s financial statements. If an acquisition turns out to be a dud and the acquired operations suffer a plunge in earnings or start losing money, the acquiring company has to write off goodwill acquired in an unwise acquisition against its current year’s earnings, some or all of the value of goodwill that it acquired as part of the acquisition.

Write-offs like these may seem to come out of nowhere when they are announced, and they can spur a deep drop in the acquirer’s stock price. It generally pays to stay out of stocks in which goodwill represents a big part of their net assets per share. If these companies have to write off just part of that goodwill, it can have a devastating impact on their earnings and stock prices.

In most cases, particularly if the goodwill comes from the acquisition of a handful of big, ambitious purchases, the risk often isn’t worth it. When we do our in-depth stock market research for stock recommendations, goodwill is just one of the important factors we take into account. At TSI Network, we think you should take a conservative portfolio approach to investing. We also recommend using our three-part Successful Investor philosophy:

1. Invest mainly in well-established companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

We often receive questions about planning and enjoying a successful retirement. Our answers to those questions, based on decades of investment experience, are all located in this FREE report: 9 Secrets of Successful Wealth Management.