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Goodwill factors

Remember how to calculate investment perfomance - Investment perfomance = Company’s market value (capitalization) + Dividends + Issuing/Repurchasing shares (with discount rate)

Where company’s market value is - Company’s market value = Net assets * Goodwill

Market value of the company, which is the biggest part of Investment perfomance, formed from Net assets and Goodwill. Net assets — first and most important factor, which we can manage if use market factors correctly (extra profit increases company’s net assets). Goodwill — second factor, but not less important and must be used propely.

In such way — market grows, cash flows, company earn a lot of money, increasing its net assets, but if goodwill is low, then investment perfomance also will be not so good.

Goodwill is especially important in final stages of the championship, where all top-teams have approximately same income and net assets value of the company. Proper management of goodwill can play a crucial role in helping to win back a couple of hundred thousand net assets gap from the leader or vice versa will throw you back, if you are not prepared.

Unlike market factors, goodwill is very difficult (and in some cases impossible) to test using «perfect tests», although there are much less influencing factors than in market. Because, goodwill factors are closely together and changing one of the factors will chain pulls the other one. Therefore, goodwill is tested in complex with using large data sets to smooth effect of secondary factors and to identify the main trend.

Goodwill depends on following factors:

  1. Dividends
  2. Liquidity
  3. Research & Development
  4. Market share
  5. Backlog
  6. Agents and Distributors
  7. Resources
  8. Investment return

 

Each factor defaults to 1 and may vary between 0.8 — 1.5. Goodwill is calculated as:

Goodwill = √ (Dividends * Liquidity * R&D * Market * Backlog * A&D * Resources * Investment)

That is, to get really exceptionally high goodwill, you need to correctly maximize each of its factors. What determines each of the factors you can read in following articles from Goodwill section.