Losing goodwill could mean a major write-off for these companies
With goodwill forming over 50 per cent of their net worth, the financial health of these companies is questionable
By Danish Khanna | May 22, 2019
In accounting, goodwill is an interesting term. When a company acquires another company and pays a premium to the market price, the premium paid is recorded as 'goodwill' in the acquirer's balance sheet under 'assets'. If the brand value of a company goes down, it has to write off part of goodwill. When this write-off happens, in order to balance assets and liabilities, the firm also has to reduce its net worth by the same amount.
In the companies listed below, goodwill forms a major part of their assets and 50 per cent of their net worth. If these companies write-off their goodwill, their net worth may take a severe hit. This can in turn increase their debt-to-equity ratios, thus putting their financial health in jeopardy.
Given that a major part of their assets is goodwill, these companies will not even have the support of assets to meet their debt obligations.
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