There are two main tenets that we should focus on when researching a company to invest in.
The first one, emphasised by quantitative analysts are the numbers behind the business. These include profitability, balance sheet or cash flow. The other, which is less easily quantifiable, is the qualitative aspect of the business. These can be in the form of a company’s business model, management or operational risks.
Both these aspects of the business are important before any investment decisions can be made.
However, many investors often overlook the intangible aspects of a good business. In reality, these can mean the difference between a good investment and a great investment. Because intangibles are hard to quantify – and are not usually expressed explicitly in the financial statements – it easy for investors to miss them.
Here, then, are three undervalued intangibles in a business.
Warren Buffett famously said that he looks for companies with a deep economic moat that gives it a competitive advantage.
One way that companies can achieve this is by building a brand that has a strong reputation amongst its consumers. This can create customer loyalty and prevent it from being disrupted by competitors looking to muscle their way into the industry.
I have written an in depth analysis on why we should not overlook brand value.
A strong Research and Development team
“The impact of this sort of thing (research and development) on investment can hardly be over-stated.” –Philip Fisher, Author of Common stocks and Uncommon Profits
Even though companies often report their research and development expenses in their financial statements, it is often hard to quantify whether the research will be profitable.
In spite of this, investors need to realise the importance of continuous research and improvements in any industry. Companies that emphasise building for the future are more likely to succeed in the longer term. The best way to grasp the strength or cost efficiency of their research team is to look for a sustained history of new developments and improvements.
A happy and committed work force
It is easy to overlook how a happy work force can impact the profitability of a business. But sociologist, have, in fact, found a tangible connection between employee engagement and happiness with the success of a business.
Companies that can create a work environment that keeps employees happy and engaged, not only attract the top talent, but also have higher efficiency and productivity.
This can have a very real impact on the performance of the company’s stock as well. A study looking at Fortune’s “Best Companies to Work For” found that companies that made this list consistently outperformed their counterparts in the stock market.
The Foolish bottom line
In an era where quantitative analysis has taken the upper hand and investors mull over the numbers of a business, it easy to overlook the value of intangible aspects of a company.
Yet, recent data has shown that companies that are strong in this department, will, in fact, have an obvious edge over their counterparts. As investors, we should never underestimate the importance of the intangible aspects of a company, or we might miss out on great investments in the future.