Ben McClure, director of Bay of Thermi Limited, as a frequent writer on investment topics, feels that the difficulty in measuring intangibles and the volatility inherent in the simplistic mark-to-market approach forces investors to ignore what might be sizeable value.
Here Ben recommends at least starting with the CIV method (Calculated Intangible Value):
1) Calculate the average pretax earnings for a three-year period;
2) On the balance sheet, get the average year-end tangible assets for the same three years;
3) Calculate the company’s return-on-assets by dividing earnings by assets;
4) For the same three years, find the industry’s ROA;
5) Multiply the industry average ROA times the company’s tangible assets (determined in #2); subtract the result from the pre-tax earnings determined in #1, yielding how much more the target company earns from its assets than the average in the industry;
6) Tax affect the result, if appropriate;
7) Calculate the net present value of the premium, yielding an estimate of the value of the intangibles.