What is the intangible asset intensity ratio and how is it used?

Full Explanation

The intangible asset intensity ratio provides a quick measure of how significant intangible assets are to a company's overall value. It can be calculated in several ways: book value basis (recognised intangible assets divided by total assets), which understates true intensity because many intangibles are not on the balance sheet; enterprise value basis (estimated fair value of all intangible assets divided by enterprise value), which provides a more accurate picture; or investment basis (intangible investment — R&D, software, training, marketing — divided by total capital expenditure), which measures the company's investment focus. Industry benchmarks for the enterprise value basis range from: technology and software (70-90%), pharmaceuticals (75-95%), professional services (60-80%), consumer goods (40-70%), and manufacturing (20-50%). The ratio is useful for several purposes: identifying underinvestment (a tech company with low intangible intensity relative to peers may be underinvesting in R&D or brand), benchmarking against sector peers (portfolio companies can be compared on intangible intensity to identify leaders and laggards), investment screening (PE firms use intangible intensity as a filter for identifying companies with value creation potential), and risk assessment (high intangible intensity implies higher sensitivity to impairment and greater estimation uncertainty in valuations). Opagio's benchmarking tools calculate intangible asset intensity ratios and compare them against industry-specific peer groups to highlight areas of strength and underinvestment.

Related Glossary Terms

Related Questions