what are intangible assets

What You Need To Know About Intangible Assets!

Evaluating the intangible assets of a company is a crucial part of the fundamental analysis, especially in a generation with a lot of leading companies in the technology and service-based industries.

However, most investors ignore this part and focus more the physical assets like land, building, equipment etc. One of the major reasons why people skip the part of studying intangible assets is because these assets are a little difficult to evaluate. After all, how would you correctly measure the value of a brand or non-physical assets of a company?

In this post, I’ll try to demystify intangible assets in simple words so that you can understand what exactly are intangible assets, why are they valuable for a company and how can you evaluate the intangible assets of a company.

Overall, it’s going to be an exciting post. Therefore, please read it till the end because I’m sure it will be helpful to you in assessing companies better.

What are intangible assets?

Intangible assets are those assets that are not physical in nature, yet are valuable because they contribute to the potential revenue of the company.

A few of the common examples of intangible assets are brand recogintion, licenses, customer lists, and intellectual property, such as patents, franchises, trademarks, copyrights etc.

Quick Note: Contrary to these, TANGIBLE Assets are those assets that have a physical form. For example- land, buildings, machinery, equipment, inventory etc. Further, financial assets such as stocks, bonds etc. are also considered tangible assets.

Although intangible assets do not have an obvious physical value such as land or equipment, however, they can be equally valuable for a company for its long-term success or failure. 

For example, companies like Apple or Coca-Cola are highly successful because of the significant brand equity. Since it is not a physical asset and tricky to calculate the exact value, still brand equity is one of the primary reasons for the high sales of these companies. In India, companies like Hindustan Unilever, Colgate, Patanjali, etc also enjoy benefits of enormous brand value.

Further, a few more examples of intangible assets can be marketing-based (ex- Internet domain names, non-competition agreements etc), artistic-based (ex- literary works, musical works, pictures etc), Contract-based (ex- franchise agreements, broadcast rights, use rights etc) and technology-based (example- computer software, trade secrets like secret formulas and recipes etc). [Credits: Examples of intangile assets- Accounting tools]

what you need to know about intangible assets cover

Moreover, in a few industries, intangible assets are more valuable.

Unlike manufacturing companies where inventories and fixed assets contribute to the majority of their total assets, in a few industries the intangible assets are more valuable:

  • Consumer product companies depend on the brand name. For example- Hindustan Unilever, Godrej, Colgate, etc. The bigger the brand name, the easier are the sales. 
  • Technology companies get the most success by their technical know-how and skilled human resource. Ex- Infosys, TCS, etc.
  • Banking companies have their computer software license, stock exchange cards and electronic trading platform (websites). Ex- HDFC bank.
  • Telecom industries use their bandwidth licenses (including spectrum) to enjoy benefits. Example- Bharti Airtel
  • Drugs and pharmacy companies protect their sales through patents, which means that they can sell unlimited medicines of patented drug and their competitors can’t enter or replicate the same. Ex- Dr. Reddy’s Laboratory, Glenmark Pharma etc.

And that’s why, the leading companies in these industries spend a lot of money in building these intangible assets. 

For example, in the IT industry, training and recruiting are more prominent than investing in physical assets like buildings.

Similarly, the pharmaceutical companies spend a lot of capital in the Research and development (R&D) which may help them get a patent on a revolutionary drug. And that’s why, while evaluating companies in this industry, the capital expenditure of the different companies/competitors in their R&D work should be carefully evaluated. 

If you look into the consumer product companies, they spend a lot of money in advertisement just for brand awareness. Although, this may not lead to instant sales and may add overhead expenses, However, over the long term. branding help these companies to generate more profit. 

Valuing Intangible Assets:

Intangible assets of a company can be found on the asset side of the balance sheet of a company. For example- here is the intangible assets for Hindustan Unilever (HUL)

hul balance sheet

Source: Yahoo Finance

You can use the intangible to total asset ratio to evaluate the worth of intangible assets in a company. For example- in the case of Hindustan Unilever, its intangible assets make around 2.05% percent of its total asset.

However, valuing intangible assets are easier said than done. One of the biggest reasons equipment high sales of HUL in India is its prominent brand recognition. A few of the popular brands of HUL are Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality the and Pureit

Here, do you really think that the brand value of HUL contributes only around 2% of its net assets? I don’t think so. It must be worth more. However, there’s no easy way to correctly evaluate the worth of the brand recognition and other non-physical assets. 

Quick fact: According to Forbes, COCA COLA’s brand value amounted to 57.3 billion U.S. dollars. It is the only company in the top seven list that sells carbonated sugar water beverages. Rest all are technology companies with Apple and Google as leaders. This is the power of branding. Read more here: The world’s most valuable brands. 

Also read:

Bottom Line:

Although intangible assets do not have a physical presence, they add a huge value to the company. There may be even cases where the intangible assets are of far greater value than the market value of the company’s tangible assets. 

However, while valuing such companies, you may have to put some efforts to study these assets as the accounting conventions do not always value the exact worth of a few intangible assets and they may be reported below their true value in the balance sheet.

Any how, look for the intangible assets that are definite (i.e. stays with the company for as long as it continues operations) and difficult to replicate.

How to buy a stock in Stock Market? Step-By-Step Explanation.

How to buy a stock in stock market? Now a day, buying a stock is as simple as recharging your mobile or transferring money. All you need is a computer with internet connection, a bank account and some money in that account, obviously.

If you have seen movie Guru (in which Abhishek Bachchan was in leading role based on the life of Dhirubhai Ambani), the scenario of the stock market might scare you. But it was something like 50-60 years back. Now, no physical appearance, no much paper works are required. You can buy a stock sitting in your room in front of your laptop and that too within 2 minutes. How? That’s what I am going to teach you now. How to buy a stock in stock market? Just be with me for the next 5-10 minutes.

Buying shares online is the easy task, but I believe first you need to find that right stock that you should buy. There are few basic works which you should go through to find the best stock for you:

Read and Research:

There are tons of websites on the internet where you can get tutorials for stock market basics and about how to buy a stock in Stock Market? For beginners, I will recommend following websites of moneycontrol, economic times and Investopedia – Sharper Insight. Smarter Investing, Learn how to follow Stock Market and trends- Trade Brains

There are few books which are must-read for the beginners in the stock market. They are:

  • The Intelligent Investor
  • One Up on the wall street
  • Beating the street
  • Common Stocks and uncommon profits

You can read further about Indian stock market from the following useful links:

Now after learning the basics, the main tasks begins. You need to learn how to follow the stock market, their trends, their fluctuations etc.

Get good financial knowledge:

A good financial knowledge is a key for the success in the stock market. You need to understand the fundamentals before entering the stock world. The basics of Earnings per share(EPS), P/E Ratio, Book Value, P/BV, Dividend, Return on Equity(ROE), Return on capital employed(ROCE), debt/equity ratio etc should be known to you before you analyze a stock. You can read further about from these links: Investment BasicsSix Different Types of Stock in Indian Market according to Peter Lynch

Make your dummy portfolio:

A portfolio is nothing but your collection of stocks from different or same sectors. A portfolio shows how many shares you are owning from which sector. Generally, a good portfolio maximizes the profit and minimizes the risk. You can learn how to create your portfolio from this link: How to create your Stock Portfolio?

Follow the stock you’re interested in for few days:

The last step before buying a stock from the stock market is to learn how to follow stocks in the stock market. You should know how to track stocks so that you can buy/sell them at the best time. I advise the beginners to at least follow the stocks for 1 month before buying them. You can learn how to follow a stock from this link: Learn how to follow Stock Market and trends- Trade Brains.

Want to learn more? Here is a best selling book on stock market which I will highly recommend to read: Beating the street by Peter Lynch

Now that you know all the basics for the stock market, you can move further on How to buy a stock in Stock Market?


How to buy a stock in Stock Market?

The basics requirements for buying a stock in the stock market are:

  1. Stockbroker: General people can’t go to a stock exchange and buy/sell stocks. Only members of the stock exchange can buy and sell and they are called the brokers. Every broker should be registered on the Securities and exchange board of India(SEBI). There are a number of brokers/ sub-brokers which you can choose for trading. Some online brokers are Sharekhan, Kotak Securities, ICICI Direct, 5paise and India Bulls.
  2. Saving Account: Obviously you need a saving account for trading in the stock market.
  3. Demat A/C: It’s very simple to open a demat account. Now a day, the banks even offer you to open a 3-in-1 account, i.e. all three Saving+ Demat+ Trading account, by filling few forms just once. The 3-in-1 account will save your timing a lot and I recommend you to open a 3-in-1 account if you want to start trading in the stocks. You can open it in banks like ICICI, SBI, Kotak etc.

    You can decide your online broker for opening demat account depending on the different factors like brokerage charges, facilities offered, annual maintenance charges etc. Here is a link which you may find useful: Compare Online Share Brokers In India And Find Best Stock Broker In India.


    Note: If you open a 3-in-1 account you won’t need to find a stockbroker as the trading account is already included in it.

  4. Laptop and Internet connection: Obviously, the soul of modern era which is a must for all the online facilities.

how-to-buy-a-stock-in-stock-market

NOTE:

The documents required to open a 3-in-1 account are PAN card, Aadhar Card (for address proof) and an ID proof (generally Aadhar/Pan card can also be used as ID card). Once you opened your demat account, you will receive your username and password, and then you can start trading using your account

Also Read:

How to trade in ICICI Direct? Buy/Sell Stocks
How to buy a Stock using SBI demat account?

I hope this post about ‘how to buy a stock in Stock Market’ is useful for the readers. Feel free to comment below or message me if you have any doubts or if you need any further help.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!