Goodwill To Assets Ratio

Think about Christmas time. Peace and goodwill toward all people. Goodwill there represents the warm feeling you get in your heart to help others. You donate some time to a soup kitchen. You invite Uncle Artie over for Christmas Eve despite his bizarre (and outspoken) political beliefs.

In the corporate world, that feeling of goodwill gets a monetary value. Goodwill in this context represents the value a company has beyond the value of its other assets. It's the intangible value that comes from a company's brand or from the business organization. Ever hear the expression "more than the sum of its parts?" That's goodwill.

In math terms, goodwill is any value the company has beyond the sum of its book value. Add up all the company's assets, subtract its liabilities, and you've got the book value (sometimes called shareholder equity). If you sell the company for more than book value, that extra gets counted as goodwill.

The goodwill-to-asset ratio measures the amount of goodwill the company has versus its other, more tangible assets. It lets you know how much of a company's value (percentage-wise) is stored in the goodwill.

You have a company that has $20 million in assets and $12 million in liabilities. Those figures mean the company's book value equals $8 million. You sell the company for $15 million. You sold it for $7 million beyond book value, meaning the buyer would put $7 million of goodwill on its balance sheet. And the goodwill-to-asset ratio for the company would be 7-to-8, or 0.875.