Apologies for another somewhat technical post – but it concerns the appropriate metric by which to measure the contribution of marketing.
A company’s value is typically expressed in two ways – market capitalization (the market value of its equity – the amount you would need to pay to buy all of the shares) or enterprise value (the total of its equity and debt – the amount you would need to pay in order to have outright ownership of all of its assets).
The success of a company in “adding value” is typically measured in terms of its intangible value, which represents the excess of its market value over its book value. Book value is defined as the difference between the total assets on its balance sheet and its total liabilities. Given that the value of the assets on the balance sheet are recorded at the lower of “historic cost or net realizable value” rather than their replacement cost, there is an argument that a more accurate measure of the amount of “value added” is the difference between market value of a company’s equity and the replacement cost of its assets – this is known as Tobin’s Q. Unless you do this adjustment, you do not know whether intangible value is just a reflection of the undervaluation of the assets on your balance sheet (the difference between their book value and their “true” market value, or replacement cost) or the proof of the existence of assets other than those that appear on the balance sheet.
So far so good? The picture was relatively clear so long as the only assets on the balance sheet were tangible (either financial or physical). The situation has become more complicated now that certain forms of intangible asset are allowed to be shown on the balance sheet. These intangible assets represent specific forms of intellectual property such as patents, contracts, copyright and trademark. Because these represent legally enforceable ownership rights, the accountants are content to see them recognized on the balance sheet – but only when they are acquired from another company (it is still not possible to show assets that were created in house on the balance sheet).
Given this context, my interest is in determining the most appropriate terms in which the value added of marketing should be expressed. First of all, should we look at market value or enterprise value? Second, should we measure the “value added” of a business relative to its book value , or its tangible book value (book value minus the intangible assets on the balance sheet), or Tobin’s Q – or a modified version of Tobin’s Q that restates only the book value of the tangible assets on the balance sheet?
My next post will suggest a couple of different measures that may make sense.
