Goodwill To Assets Ratio Calculator

What this calculator does

A separate tool on this site works out how goodwill is created when one company buys another. This one asks a different question about goodwill that already exists: how much of a company's asset base does it account for?

The calculation is a straightforward proportion:

Goodwill to assets ratio = Goodwill ÷ Total assets × 100

Enter the goodwill carried on the balance sheet and the total assets, and you get a percentage. It is a screening figure, quick to compute and quick to read, and it points at something the individual numbers do not.

How much of the balance sheet you cannot kick

Assets vary enormously in how solid they are. Cash is cash. Inventory can be counted in a warehouse. A building can be walked through, and if the business fails, someone will buy it. These things have a value that exists independently of the company's own story about itself.

Goodwill has no such independent existence. It is not a thing, it is the residue of a price someone once paid, and its continued presence on the balance sheet rests entirely on management's annual judgement that the acquired business is still worth what was paid for it. There is nothing to inspect, nothing to sell separately, and no market price to check it against. If the acquired business struggles, goodwill is worth less, and there is no way to know that from outside except by watching for the write-down.

So this ratio is really measuring what proportion of the company's assets consists of a valuation judgement rather than a verifiable thing. A company at 5 percent has a balance sheet you could largely kick the tyres on. A company at 40 percent is asking you to accept that a large slice of what it owns is worth what it says it is worth. Neither is wrong, and heavy acquirers often have excellent reasons for it, but they are different propositions and the ratio makes the difference visible in one number.

Two figures from the balance sheet

1. Unamortized goodwill. The goodwill figure as it currently stands, after any impairments already taken. It normally appears under non-current assets, sometimes bundled with other intangibles, in which case the notes will split it out.
2. Total assets. The total assets line from the same balance sheet, on the same date.

Press Calculate for the percentage, or Reset to clear the fields. Both figures must come from the same balance sheet, and note that goodwill is already included within total assets, so the ratio is a share of a whole rather than a comparison of two separate things. That is why it cannot exceed 100 percent.

A company carrying a heavy goodwill balance

Take a company with goodwill of 160,000,000 sitting inside total assets of 400,000,000.

• Goodwill to assets: 160,000,000 ÷ 400,000,000 = 40 percent

Two-fifths of everything this company owns is the residue of prices it paid for other businesses. For comparison, the same 400 million of assets with goodwill of 20 million gives 5 percent, and with goodwill of 300 million gives 75 percent. The arithmetic is trivial. What makes the number worth calculating is what it implies if the judgement behind that goodwill turns out to be wrong.

Why a write-down hurts equity far more than assets

This is the part the ratio is really warning you about, and the arithmetic is worth doing once because it is more brutal than people expect.

Suppose that company with 40 percent goodwill has equity of 180,000,000, the rest of its assets being funded by debt. Now suppose an impairment test goes badly and half the goodwill is written off, an 80,000,000 charge.

• Total assets fall from 400,000,000 to 320,000,000, a reduction of 20 percent
• Equity falls from 180,000,000 to 100,000,000, a reduction of 44 percent

The asset base lost a fifth. The shareholders lost nearly half their book value. The reason is that a write-down does not touch the debt at all. Liabilities are contracts and they stay exactly where they are, so the entire loss lands on equity, which is the smaller number. The higher the goodwill ratio and the more debt in the structure, the more violently that leverage works.

And it arrives all at once. Because goodwill is not amortised gradually but tested and written down in lumps, there is no warning in the accounts before it happens. A high goodwill-to-assets ratio is therefore best read as a measure of exposure: not a prediction that a write-down is coming, but a statement of how much damage one would do if it did.

Reading the number against the industry and against last year

There is no universal threshold, and anyone offering one is guessing. What the figure means depends heavily on context, and two comparisons do most of the work.

The first is the industry. Businesses whose value lives in people, software, brands and relationships tend to be bought for far more than their tangible assets, so software firms, agencies, consultancies and pharmaceutical companies routinely carry high goodwill. Businesses built on physical plant, such as manufacturers, utilities and property companies, tend to carry little. A 40 percent ratio might be unremarkable in the first group and genuinely striking in the second, so compare a company against its own sector rather than against a general rule.

The second is the company's own history. Track the ratio across several years and it tells a story about strategy. A ratio climbing steadily means growth is being bought rather than built, which is neither good nor bad in itself but does mean the company's future depends on integrating those purchases well. A ratio that drops sharply in one year is usually not good news: it generally means an impairment, so look for the write-down and what management said about it.

One practical companion measure. Subtracting goodwill from equity gives tangible book value, which is what would be left if the goodwill proved worthless. For a company at 40 percent, that is a sobering and useful second number to keep beside this one.

Questions people ask

What counts as a high ratio?

It depends on the industry. Acquisitive, people-and-brand businesses commonly run high, asset-heavy industries commonly run low. Compare against similar companies rather than a fixed threshold.

Is a high ratio a bad sign?

Not by itself. It signals that much of the asset base rests on valuation judgement and that a write-down would be painful. Plenty of successful acquirers carry high goodwill and never impair it.

Where do I find the goodwill figure?

Under non-current assets on the balance sheet. If it is grouped with other intangibles, the notes to the accounts will break it out separately.

The ratio fell sharply this year. Why?

Usually an impairment, meaning goodwill was written down because an acquisition is no longer considered worth what was paid. It can also fall simply because total assets grew. Check whether goodwill itself dropped in absolute terms.

References

Goodwill acquired in a business combination must have its recoverable amount assessed every year, and where the carrying amount exceeds the recoverable amount an impairment loss is recognised, reducing the carrying value and passing straight through profit or loss. The treatment of goodwill and the adequacy of impairment testing remain the subject of active work by the international standard setter, which has considered and retained the impairment-only approach.

1. IFRS Foundation, IAS 36 Impairment of Assets. https://www.ifrs.org/issued-standards/list-of-standards/ias-36-impairment-of-assets/
2. IFRS Foundation, Business Combinations: Disclosures, Goodwill and Impairment (IASB project). https://www.ifrs.org/projects/work-plan/goodwill-and-impairment/