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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: James Clarke who wrote (5222)	10/31/1998 12:57:00 PM
From: Ron Bower	Read Replies (2) \| Respond to of 78552

Jim, Don't you counter your own position? "Goodwill is the amount paid above the BV" - Accepted. Then you say, "Depreciation is a real expense because depreciation of assets usually has to be replaced by capital expenditures (cash)" Depreciation is the primary reduction on BV and if considered a 'real expense', then how can you ignore 'Goodwill'? I understand and agree with much of what you are saying about cash flow but feel you paint with too broad a brush. IMO for value determination, the 'value' and 'rate' of reduction on Goodwill must be considered as one considers the rate on Depreciation. Each can be an overstated or understated expense. Example: A company pays above BV for a software company that's carrying a large R&D asset and sets up the Goodwill amortization over a 10 year period. In 10 years the software would likely be obsolete. I would write off both the Goodwill and R&D assets and base forward value of the company purely on anticipated operational cash. The opposite: A company pays above BV for a manufacturing company with modern equipment and facilities that they have been depreciating on a 3-5 year schedule. One can assume that the facilities are worth far more than the BV and that the Goodwill is justified. I would accept BV and base future value on BV plus operational cash (adjusted to a realistic depreciation and amortization of assets) IMO 'Goodwill' is not something to be ignored and must be looked at carefully. JMHO, Ron