Intangible factors are a far more important factor for investors to measure when determining a company’s market value, according to research.
Investors traditionally seek to understand tangible results like earnings, business metrics and more, but Ocean Tomo has found much of a company’s value is driven by assets not on the balance sheet.
Ocean Tomo, a US-based research and ratings firm, found that 84 per cent of the market value of the US S&P 500 equity index is in intangibles, assets not captured on the balance sheet.
That leaves only 16 per cent of market value to be tangible, which includes earnings, ratios, estimates, property etc., but this is the largest portion investors focus on.
Intangibles are far harder to measure as these are a result of human intellect, reputation, recognition and more, according to chief executive of Contango Asset Management Marty Switzer.
“Corporate culture is an intangible factor. It is often described as the ‘DNA of the organisation’ and shapes interactions with internal and external stakeholders,” he said.
The recent royal commission revelations have highlighted the need for investors to garner greater insights into the corporate culture of the companies they invest in.
“Unhappy banking clients affected by the fees-for-no-service scandal joined disgruntled shareholders and have seen their shares fall in value by more than 20 per cent over the past five years in some cases,” Mr Switzer said.
In contrast, companies with good reputation had seen their share price rise by more than 450 per cent in the exact same period.
“Corporate culture is as important to a company’s health and future as any financial indicator. I’d also argue that culture is the single best predictor of long-term performance and viability,” he said.
Mr Switzer added that investors increasingly wanted to know what lessons chief executives had learnt from other leaders, what the core values of the company were and how they were integrated.
“Companies with a positive workplace culture consistently deliver superior investment returns,” the chief executive said.
“Engaged employees keep customers happy and generally deliver consistently on business objectives. This can translate to more innovative products, higher sales, lower costs from staff turnover and lower financial volatility.”