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Known Knowledge Capital
Valuation Techniques
By: Jeff
Westphal
Measures of the
Whole
Market Value to
Book Value
Tobin's Q
Calculated
Intangible Value
Baruch Lev's
Knowledge Capital Valuation
Paul
Strassmann's Knowledge Capital Valuation
Scoreboard
Valuation Techniques
Karl Sveiby's
Intellectual Assets Monitor
Leif
Edvinsson's Skandia Navigator
Miscellaneous
Knowledge Capital Valuation Techniques
Market Value to Book Value
Summary:
This valuation technique assumes that the difference between a
firms market value and book value is a is a firm's intellectual capital.
The assumption is that everything left after accounting for fixed assets
is intangible assets.
Method: Intellectual Capital =
Market Value (Price/Share x # of shares) - Book Value (Equity - Debt)
Strengths: Quick and simple measure to calculate and
apply.
Weaknesses: Volatility; Market and book values
generally understated; Questionable meaningfulness (ie. what does value
mean?)
Alternative approach: MV/BV Ratio facilitates comparability
between companies.
Source: Intellectual Capital: The New Wealth of Organizations--Thomas
Stewart
Tobin's Q
Summary:
This valuation technique is a ratio that compares market value of
an asset with its replacement cost. It could theoretically be used as a
measure of intellectual capital.
Method: Market
Value/Replacement Cost
Strengths: More reliable gauge of
value of intangible assets.
Weaknesses: Very difficult
to quantify replacement costs. Hence, difficult to apply.
Source: Intellectual Capital: The New Wealth of Organizations--Thomas
Stewart
Calculated Intangible
Value
Summary: This valuation technique assumes
that the value of intangible assets equals a company's ability to
outperform an average competitor that has similar tangible assets. MV is
higher because it reflects what it would cost a buyer to create similar
tangible assets. MV is higher because it reflects what it would cost a
buyer to create assets from scratch.
Method:
Calculate average pretax earnings for three years
Calculate
average year-end tangible assets for 3 years
Divide earnings by assets
--> company average ROA for 3 years
Find industry average
ROA
Multiply industry ROA by company's tangible assets. Subtract
product from
company's pretax earnings. --> Excess
return.
Calculate 3 year average tax rate. Multiply by excess
return
Subtract from excess return --> premium attributable to
intangible assets.
Calculate Net Present Value of Premium. Divide
premium by discount rate. (ie, cost of capital)
Strengths:
Permits company to company comparisons using audited financial
data. Provides signals to management. Comparing a company's CIV with the
MV/BV ratio may help one judge whether company is a fading business or a
company with hidden value.
Weaknesses: Requires more
effort to apply. Also, more static than MV/BV because financial data only
comes out quarterly while MV adjusts daily. Not forward looking;
Historical.
Source: Intellectual Capital: The New Wealth of Organizations--Thomas
Stewart
Baruch Lev's Knowledge Capital
Valuation
Summary: Baruch Lev's knowledge capital
valuation approach employs both past earnings and future earnings
projections.
Method:
Knowledge Capital = (Normalized
earnings - earnings from tangible and financial assets)/(Knowledge capital
discount rate)
Strengths: Valuation is forward looking.
It has some predictive capability.
Weaknesses: Requires
more effort to apply.
Sources:
New Math
for a New Economy
Seeing is Believing--A Better Approach to Estimating Knowledge
Capital
The Second Annual Knowledge Capital Scoreboard
Paul Strassmann's Knowledge Capital
Valuation
Summary: Paul Strassmann's approach
considers "economic profits" to be directly attributable to "what
knowledge capital has actually delivered."
Method:
Knowledge Capital = (Profits - Financial Capital
"Rental")/(interest rate cost of long term debt)
Strengths:
Easy to apply.
Weaknesses: Not forward looking.
Sources:
Calculating Knowledge Capital
Taking
the Measure of Knowledge Assets
The Value of
Knowledge Capital
Does
Knowledge Capital Explain Market/Book Valuations?
The
Ticker Tape Charade
Karl Sveiby's Intangible Assets
Monitor
Summary: Karl Erik Sveiby's scoreboard
approach presents a multitude of indicators of intangible asset value.
Sveiby breaks these indicators out into three distinct categories:
External Structure, Internal Structure, and Individuals' Competence. The
indicators examine growth, renewal, efficiency, and stability/risk in each
of these categories.
Method:
Scoreboard
Strengths: One can perceive a
company's intellectual capital strengths and weaknesses by looking at such
a scoreboard.
Weaknesses: Does not result in an overall
quantifiable value.
Sources:
The Intangible Assets Monitor
Measuring Intangible Assets and Intellectual Capital - An
Emerging Standard
The
"Invisible" Balance Sheet
Leif
Edvinsson's Skandia Navigator
Summary: Leif
Edvinsson's scoreboard approach, like Karl Sveiby's, presents a multitude
of indicators of intangible asset value. Edvinsson is the director of
intellectual capital for financial services company, Skandia
International. Edvinsson presents an intellectual scoreboard in Skandia's
annual reports. Edvinsson's scoreboard breaks these indicators out into
four intellectual capital categories and one financial category. The
categories are finance, customer, human, renewal and development, and
process.
Method: Scoreboard
Strengths:
One can perceive a company's intellectual capital strengths and
weaknesses by looking at such a scoreboard.
Weaknesses:
Does not result in an overall quantifiable value.
Sources:
Skandia
International Web Site--Intellectual Capital Section
New
Metrics for a New Age
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