What Is Goodwill On A Balance Sheet

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      Lesson summary:

      The lesson explains what goodwill is and the opinions of Warren Buffett and Benjamin Graham on the topic. Goodwill is an intangible asset that represents the value of a company’s brand name, customer loyalty, patents, etc. on a balance sheet. Tangible assets, on the other hand, are things that can be touched, such as inventory and cash receivables. Goodwill is added to a balance sheet when a company acquires another company for a premium. Before 2001, companies had to amortize goodwill over a 40-year period, but this is no longer necessary. Economic goodwill is defined as the return on net tangible assets that are expected to produce earnings considerably in excess of market rates of return. Buffett believes economic goodwill is good protection against inflation if you plan on owning your shares for a long time, but it is a balancing act to consider if you plan on owning those assets for a shorter period. Graham’s opinion is that a company’s market price should be less than its book value, which is the margin of safety.

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