Definitions: Company's tangible assets are assets owned by the company that are concrete, which can be touched. They are real estate, machinery, stocks, etc. (physical and financial capital).
Intangible assets are the company's properties that, on the contrary, are difficult to see, to touch, but which can be perceived: they are its brands, the quality of its management, its strategy, its ability to communicate with the market and with society, are values and moral principles, it is the perception of perpetuity it transmits, it is good corporate governance, its ability to attract and retain the best talent, its capacity for innovation, its stock of knowledge, etc.
We don't see a lot of “Literature” about intangibles these days. But no one doubts that they are as or more important than tangible ones. The concept of intangibles is linked to those who have a business to last. Managements that demand quick results are possibly not giving due importance to intangibles.
Value of companies: The market value of a company is a multiple of the share price and the number of shares. Company value is the value that the market is or would be willing to pay to acquire the company. For those not listed on a stock exchange, it is customary to estimate their value as a multiple of their EBITDA (operating cash flow) minus debt.
Value of companies and their intangibles: In the past, the value of companies was very close to the value of their tangible assets, that is, the company was evaluated by measuring the value of its factories and its inventories, by the replacement value of its fixed assets . Forty years ago, a company's value was the value of its assets plus a premium that rarely exceeded 10%, that is, the company's value was constituted by 90% by the value of its tangible assets and only 10% by its intangibles. Today, the value of the 500 companies in the S&P 500 (the world's top 500 publicly traded companies) is made up, on average, of just 20% of tangible assets and 80% of intangibles.
That's why we see incredible stock price fluctuations these days and we may have, as we've recently had, values that have degraded sharply - we've seen stock prices fall, at times, to a tenth of what they were worth. A company that is caught in a lie can see its entire intangible value turn to dust. The administration of a company can create a lot of intangible value, but it can also destroy it very quickly, hence the importance of good corporate governance standards, and also that the company is and appears to be a responsible company. Integrity is a “sine qua non” condition for the executive who wants to develop intellectual capital. Righteous with himself, with others, with humanity.
This reality is, of course, not only valid for the US. As of the date I am writing these notes, Natura, the leading company in the Brazilian cosmetics market, has a market value of 3.5 billion US$. More than 90% of this amount are intangibles. In just 1.5 years since its IPO, the company has created 2.3 billion US$ in value, having invested in Capex and operating working capital, that is, in tangibles, less than 100 million US$. The market greatly values the company's beliefs that it is possible to do business without destroying nature and to progress sustainably, seeking to build a better world. The market believes that the purposes of the administrators are sincere and constant and that consumers increasingly know how to recognize and reward these principles. This is why the “Natura” brand is one of the three most valuable in the Brazilian market.
Training of business administrators: I would like to close my comments by talking about the inadequate academic training on this topic. In fact, when I graduated in engineering 44 years ago, I was instructed to deal only with hard assets, which was absolutely normal at that time. What is unusual is that engineering, business and economics schools continue to train future executives in much the same way! We are all self-taught in managing the greatest value of our companies. The curricula of these schools need to be revised to adapt to the new reality.
Edson Vaz Musa is former president of Rhodia do Brasil and current chairman of the board of Caloi. Five times he was elected one of the ten most important businessmen in the country. He sits on the board of companies Natura, WEG, J. Macedo and several other non-profit companies.