T2’s annual review of intangible value involves creating a rich data set about long-run business performance and valuation. In addition to doing the analysis around intangible value, we also like to use the data to generate some “normative” values for how companies are valued, and how different industries vary in terms of profitability and valuation.
Here are a few observations based on 11 years of data for more than 100,000 companies across the world:
- The average company has a net income margin of 5.6%, a market capitalization equivalent to 18.3x its net income, and has a total enterprise value equivalent to 1.3x its revenue
- The industry with the highest margins is Pharma & Biotech (average net income margin of 15.3%), with Food & Staples Retailing having the lowest (2.3%) – this results in Pharma & Biotech companies being valued at 3.1x revenues but Food & Staples Retailers being valued at only 0.5x revenues
- The average company has net working capital equivalent to 11% of its revenue, with Software and Pharma both having ratios of more than 30% (reflecting their business models of long reimbursement cycles) while a number of industries enjoy negative net working capital (Retailing, Transportation and Telecoms – reflecting their ability to get cash from customers before delivering the service or paying their own suppliers)
- The average company has debt equivalent to 30% of its enterprise value, with the highest level of borrowing relative to value in Automotive (58% of total enterprise value) and the lowest in Software & Services (8% of value)
- Industries fall into three broad categories in terms of the proportion of their value that is represented by tangible assets – traditional “heavy” industries in which tangible assets still account for over half their value (Utilities; Energy; Transportation; Materials); industries which depend on a mix of physical assets and intellectual property (Telecom; Capital Goods; Technology Hardware) in which tangible assets account for less than half but more than 1/4 of their value; and “asset-light” industries in which tangible assets for less than 1/4 of their value (Household & Personal Products; Software & Services; Media; Pharma & Biotech)
- As noted in yesterday’s post, the most important observation is that tangible assets only account for 43% of the value of the average company – and this raises the important question about the nature of the economic resources that companies are using, but not able to record on their balance sheets