What is the Goodwill-to-Assets Ratio?
The goodwill-to-assets ratio describes the percentage of a firm's total assets that can be explained by the amount of goodwill on the balance sheet.
How Does the Goodwill-to-Assets Ratio Work?
The formula for the goodwill-to-assets ratio is:
Goodwill to Assets = Goodwill / Total Assets
For example, let's assume Company XYZ has $5,000,000 of goodwill on its balance sheet. Its total assets are $20,000,000. Using this information and the formula above, we can calculate that Company XYZ's goodwill-to-assets ratio is $5,000,000 / $20,000,000 = 25%. That is, 25% of its total assets are in the form of goodwill.
Why Does the Goodwill-to-Assets Ratio Matter?
Increases in the goodwill-to-assets ratio might suggest that a company has been aggressively acquiring other firms or has seen its tangible assets decrease in value. When a large portion of total assets are attributable to intangible assets (such as goodwill), the company may be at risk of having that portion of its asset base wiped out quickly if it must record any goodwill impairments. Decreases in the goodwill-to-assets ratio suggest that the company has either written down some goodwill or increased its tangible assets.
Asset needs vary from industry to industry. This is why comparing goodwill-to-assets ratios is generally most meaningful among companies within the same industry, and the definition of a 'high' or 'low' ratio should be made within this context.
