The Business of Value Investing.pdf

236 The Business of Value Investing

is the largest zinc recycler in the country with very little competition,

the value of the company ’ s assets is further strengthened.

Looking at Horsehead ’ s balance sheet, there is no goodwill of

any kind in the asset portion. While most investors are cognizant

of the goodwill fi gure on the balance sheet, very few investors give

the goodwill fi gure the seriousness it deserves. And as usual, the

consequences of this negligence become signifi cant when markets

are declining, thus exaggerating the potential loss exposure to

many portfolios.

Goodwill Basics

Goodwill is not a physical or tangible asset like cash or property. Good-

will is an accounting value that normally arises when one company

acquires another. It represents the markup a company pays above

and beyond the book value of a business.

To illustrate, suppose Company A decides to acquire Company

B. The balance sheet of Company B is presented next.

Assets

Cash $ 20 million

Inventory $ 50 million

Receivables $ 60 million

Property, plant, and equipment $ 120 million

Total assets: $ 250 million

Liabilities

Payables $ 20 million

Short - term debt $ 20 million

Long - term debt $ 100 million

Total liabilities $ 140 million

Equity $ 110 million

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