“Big Joe” Clark Column: Navigating the Unstable Fundamentals and Deciphering the Intangibles | Columns


Stock exchanges report the price at which a willing buyer and seller agree for a share of a publicly traded stock. In most cases, the buyer and the seller do not know each other’s identity, and the desire to buy or sell can arise from many scenarios.

For this column, assume the trade was unnecessary and the valuation was based on the fundamentals of the underlying company.

This fundamental value is based on the evaluation of a multitude of financial assessments. The information needed to assess a business is contained in its financial statements. The balance sheet, with the help of introductory algebra, provides the value of equity. In short, owners’ equity is the value of their total assets minus their total liabilities.

What happens on the balance sheet is not in question. However, the value of assets on the balance sheet is often questioned. The aftermarket offers a net price for steel or even a fully assembled automobile, but what is a patent, a corporate brand or software worth? How quickly can this value change?

The tech boom has impacted balance sheets just like stock markets. According to Ocean Tomo’s Intangible Assets Market Value Study, intangible assets as a percentage of balance sheet assets grew from 17% in 1975 to 90% in 2020. The greatest growth occurred between 1985 (to 32 %) and 1995 (68%). %).

Value is in the eye of the beholder, and balance sheets are no different. CFOs defend their valuations for assets on their balance sheets, but not everyone may agree with the reported values.

“Defending a balance sheet to financial analysts is his art form,” says Adam Harter, CFA, chief investment officer at the Financial Enhancement Group. “When doing a fundamental valuation of a company, you need accurate financial data and must decipher between fiction and reality. Company leaders have a natural inclination to believe that their assets are worth more than less.

Common errors in the balance sheet come from missing or incorrectly coding transactions, omitting transactions completely, forgetting inventory changes, and inconsistencies. These challenges are likely to relate to small or struggling businesses, but the themes are familiar to even the largest companies. Think of Enron.

The challenge for investors in moving from the tangible to the intangible is remarkable. Tangible assets are easy to value and insurable. Intangible assets are difficult to value and difficult to insure. How should an investor plan for remarkable increases in value for new drugs and technologies while simultaneously preparing for the immediate obsolescence of high-value software?

Investing is not for the faint of heart. The process is smooth and requires a keen eye for proper understanding.

Joseph “Big Joe” Clark, whose column is published on Saturdays, is a Certified Financial Planner. He can be reached at [email protected] or



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