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Consilient Observer
April 12, 2022

Intangibles and Earnings

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April 12, 2022

Intangibles and Earnings

Consilient Observer

Intangibles and Earnings

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April 12, 2022


Improving the Usefulness of Financial Statements

  • The shift from tangible to intangible investments has complicated the ability to interpret financial statements.
  • One solution is to record intangible investments on the balance sheet and then amortize them over their useful lives.
  • We apply this approach to two companies in different industries and the S&P 500 index.
  • This results in a huge operating profit margin expansion for the company that is intangible intensive and an insignificant change for the one that is tangible intensive. We estimate that earnings for the S&P 500 would be about 12 percent higher.
  • This analysis suggests that one should compare earnings or valuation multiples over time with great caution.
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