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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 why if you want to get really high goodwill, you should maximize each of its components properly. Briefly about each factor and what to do to make it good. Later we will reveal specific factors deeper.

 

Dividends

Pay, pay and pay again, but pay just enough that increasing investment perfomance from increasing goodwill overlaps decreasing investment perfomance from reducing net assets of the company.

 

Liquidity

Plan ahead, the more the better. Goodwill uses only your own funds. Credits do not count in goodwill calculation (except for decreasing income because of interest payments).

 

Research & Development

Getting developments affect very positively, so prepare more R&D for 5 period, it will give a nice bonus to goodwill.

 

Market share

There is no unified opinion, what exact make influence — number of sold products or total revenue of the company, but in any case, large share of the market makes a significant contribution to the goodwill. Leaving the market or conscious cost reduction in sales promotion negatively affects goodwill and often overrides all bonuses from savings.

 

Backlog

Trouble does not come alone. Could not deliver enough products to your customers? Then wait for goodwill reducing by this factor.

 

Agents and Distributors

It is simple. Agency network is growing — goodwill increases, network decreases — goodwill falls, the main thing to remember that everything is good in moderation and hiring 99 agents would not be appreciated by shareholders.

 

Resources

It is difficult, probably this factor includes production facilities in general (machines, mechanics, workers, factory). In any case, do not use outsourcing to much.

 

Investment return

This refers to the return on investment of your shareholders. The more you pay dividends, the higher profitability of investment.


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