icTracker is the first and only software tool in the world that has been designed and developed purely for measuring,
tracking and reporting the Intellectual Capital of listed firms.
Over the past decade, there is a growing realization worldwide that the
Intellectual Capital of a firm is responsible for the competitive difference between itself and other firms
in the industry. Consequently, many firms have initiated efforts for managing their own Intellectual Capital and disclosing the same
periodically to their stakeholders. Due to lack of standards in this area, each firm that has gone down this road has followed its own
format for reporting its Intellectual Capital and has disclosed only as much as was convenient for its own business.
Apart from uniformity, such efforts have also lacked objectivity in many cases but more importantly they have been unable to
assess the Intellectual Capital of the firm in monetary terms, which is vital
for a meaningful comparison of the firm within its Industry and even with itself over time.
Until NOW!
Considering this state of affairs, Attainix Consulting set about to develop a best-in-class methodology for assessing the
Intellectual Capital of publicly listed firms, based on the firm's own financial disclosures.
After studying firm valuation methodologies from the financial world, and Intellectual Capital assessment methodologies listed below,
Attainix Consulting combined both to design a practical Intellectual Capital valuation methodology and developed the same into the icTracker software tool.
The best part of this methodology is that it uses publicly available data and
allows for the comparison of the firm's Intellectual Capital across Industries and over
time. It can also be used to calculate the Intrinsic price of the stock and thereby to identify overvalued and undervalued stocks.
In this manner, it becomes a powerful decision making tool in the hands of investors such as buy-side analysts, sell-side analysts, High NetWorth Individuals
(HNIs) and even the Retail Investor.
Attainix Consulting has developed the valuation methodology for icTracker after studying other Intellectual Capital assessment methods such as
- Calculated Intangible Value by NCI Research
- Economic Value AddedTM Reporting by Stern Stewart and Co.
- Intangibles Scoreboard by Dr Baruch Lev and F Gu, Stern School of Business
- iValuing Factor by Standfield
- Options Approach based on Options Theory
- Sullivan's work by Patrick Sullivan
- Technology Factor by Khouri
- Tobin's Q by James Tobin
- Value-Added Intellectucal CoefficientTM by Pulic
Any user who is not familiar with the concept of Intellectual
Capital will do well to read the entire contents of this Help page to familiarize
himself with the terminology that is used in IC Tracker. Additional web links are
provided on the Links page where the user
can find more theoretical information about this very exciting and pertinent topic.
Intellectual Capital in its simplest form refers to all the Knowledge based Assets of a firm. However it is
a term that has been defined differently by experts in this field.
- Brooking (1996) defines it as "the combined intangible assets, which enable the
company to function."
- Stewart (1997) defines it as "packaged useful knowledge".
- Roos et al. (1997) defines it as the "sum of the knowledge of its members and the
practical translation of this knowledge into brands, trademarks and processes."
- Edvinsson and Malone (1997) define it as "the possession of the knowledge, applied
existence, organizational technology, customer relationship and professional skills
that provide a company with competitive edge in the market."
- Sveiby (1997) defines it as "invisible assets that include employee competence,
internal structure and external structure."
- Sullivan (1998) defines it as "Knowledge that can be converted into profits".
- The Konrad Grop (1998) refers to it as "know-how capital"
- Viedma (1999) defines it as "equal to a company's core competencies"
- Kaplan and Norton (2001) use the term intangible assets, which they define as the skills,
competencies and motivation of employees; databases and information technologies; efficient and responsive
operating processes; innovation in products and services; customer loyalty and relationships; and
political, regulatory and social approval.
At Attainix Consulting, we like to combine the definitions by Brooking (1996) and Sullivan (1998) to define Intellectual Capital
as "the combined Knowledge, which enable the company to function and that can be converted into profits"
We have put together the following picture to convey this definition graphically.
In the above picture, a company's capital is depicted from both an internal and
an external perspective. Looking at the internal perspective, we can see that the
assets that are listed on the balance sheet include the tangible assets(land, plant
and equipment, etc.) and intangible assets(Sofware, Goodwill, etc.). The Book Value
of the company's share is computed by dividing the Net Worth
of the company by the total number of shares outstanding. Thus the balance sheet
of the company can be used only for computing the Book Value of the company's shares.
Clearly, the book value of the company does not account for the Knowledge Assets
of the company. Hence it is inadequate for knowing the true worth of the
company. If we depict all the knowledge assets of the company as "Intellectual
Capital" as shown in the picture, and add it to the Net Worth, we reach a value
which can be called the Intrinsic Worth of the company. The Intrinsic Worth of a
company better reflects its true value, and is very close to the Market Value of
the company as shown in the external perspective.
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Net Worth refers to the value of the company as carried on its books. It is determined
by subtracting liabilities on the balance sheet from the assets. It is also know
as the owner's equity and equals the paid-up share capital plus the reserves on
the company's books of accounts. The Net Worth of the company seldom reflects its
true worth, as reflected by the fact that the Market Cap
of most companies is a multiple of its Net Worth.
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Market Cap refers to the total market value of all of a company's outstanding shares.
It is determined by multiplying a company's outstanding shares by the current market
price of one share. Investors typically use this number to determine a company's
size. ICTracker uses the Actual Stock Price and the latest
available outstanding shares figure for determining the market cap of the company. This ensures
that the Intrinsic Worth of the company is compared against the Market Cap on (near about) the same
date, thus making the comparison highly meaningful. Since the share price of the company fluctuates
heavily during trading hours, the market cap of the company fluctuates accordingly.
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As the name implies, Knowledge Turnover is a ratio that indicates how many times the Intellectual
Capital of the Company is being turned into Sales during the year. It is obtained by dividing the annual
Sales of the company by its Intellectual Capital.
It is desirable to have a high value for Knowledge Turnover.
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Discount Rate refers to the earnings rate used in calculating the present value of future cash flows
using the discounting process. By default, IC Tracker uses the Weighted Average Cost of Capital of
the Company (as calculated from data available from its latest financial statements) as the Discount Rate.
The effective Discount rate used during the calculation process is arrived at by adding the
Liquidity Premium to the Discount Rate.
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Liquidity Premium refers to a percentage that reflects how liquid a company's stock is compared to another
stock. By default IC Tracker sets the Liquidity Premium of a stock to its ImpactCost, where this data is available.
Liquidity Premium is added to the Discount Rate during the calculation process.
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MVToIV refers to the ratio of the Market Cap to the Intrinsic Worth
of the Company. A value greater than 1 indicates that the company's stock is overvalued
whereas a value less than 1 indicates that the company's stock is undervalued.
Note that since Intellectual Capital, as calculated by ICTracker, is relevant as
of a specific date (typically the Quarter end date), the MVToIV ratio is also relevant
as of the same date.
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K Basis refers to the Knowledge Basis of the Company. It is computed by dividing
the Intellectual Capital of the company by its Intrinsic Worth.
The K Basis is a very important ratio, since it can be used to determine which company
is relatively more knowledge based within the same Industry. A higher value of K
Basis indicates that the company is more knowledge based and a lower value indicates
that it is less knowledge based.
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IC Net Margin is short for the Intellectual Capital Net Margin of the Company. It is computed by
dividing the annual NPT of the company by its
Intellectual Capital . A high value of IC Net Margin indicates that the
Intellectual Capital of the company is contributing positively to the "bottom line" - hence
everything else being equal a high value of IC Margin is desirable.
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IC Gross Margin is short for the Intellectual Capital Gross Margin of the Company. It is computed by
dividing the annual EBITDA of the Company by its
Intellectual Capital. A high value of IC Gross Margin indicates that the
Intellectual Capital of the company is contributing positively to Operating Profits
- hence everything else being equal a high value of IC Gross Margin is desirable.
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Intrinsic Stock Price is determined by dividing the Intrinsic Worth of the company
by the total number of shares outstanding. It reflects the true price of the company's
stock as of the date that the Intrinsic Worth is calculated. The Intrinsic Stock
Price can therefore be compared to the Actual Stock Price of the company to determine
whether the stock is undervalue or overvalued.
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Actual Stock Price refers to the closing market price of the company's stock as
of the date that the Intrinsic Worth of the Company is calculated. Typically, this
date is one of the four quarter-end dates during the year.
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Latest Stock Price refers to the latest available closing market price of the company's stock.
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Past Financials refers the publicly available historical financial information of
the company. Typically, companies publish quarterly income updates and a annual
balance sheet. IC Tracker uses the past financial data for calculating
the Intellectual Capital of the company
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In accounting parlance, Sales is defined as the revenue obtained from each recorded incidence of a sale of
goods and/or services as recognized in the accounting system. Income from Sales
normally contributes to the bulk of the Total Income of a company.
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Total Income or "Gross Income" is computed by adding together Sales revenues and
Other Income, which typically includes Interest Income, Rental Income, etc.
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EBITDA is short for "Earnings Before Interest, Taxes, Depreciation and Amortization". It is calculated by
deducting operating expenses from Total Income. In other words tax, interest expense,
depreciation and amortization expenses are not deducted when calculating EBITDA. Hence this measure reflects the
operational profit of the company since it leaves out the effect of financing and accounting decisions. Typically,
investors needs to use this measure along with other financial performance measures to arrive at a true picture of
financial performance of the company.
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PBT is short for "Profit Before Tax". This is a measure that can be used to look at the company's profits before
it has to pay corporate taxes. It is also sometimes referred to as "Earnings Before Tax".
It is calculated by deducting all expenses from Total Income including operating expenses,
interest and depreciation expenses, but leaving out the payment of tax. This measure is useful because tax expense is
constantly changing and taking it out helps to give an investor a good idea of changes in a company's profits from
year to year.
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PAT is short for "Profit After Tax". It is calculated by starting with the company's total revenue.
From this the cost of sales, along with other financial expenses such as interest, depreciation
and amortization is removed to arrive at Profit Before Tax. Tax is then deducted from
this number to reach the PAT number. This number is found in the company's income statement and is an
important measure of how profitable the company is over a period of time.
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NPT is short for "Net Profit". It is also sometimes referred to as "Net Income". It is calculated by
deducting Minority Interest from PAT. This measure is also used to calculate Earnings
Per Share. It is often referred to as "the bottom line".
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EVA is short for "Economic Value Added". It is a measure of the surplus value created by the business.
It is calculated as the product of the excess return made by the business and the capital invested in the
business. EVA = (Return on Capital Invested - Cost of Capital)(Capital Invested). A positive EVA indicates
that the business is creating shareholder wealth, whereas a negative EVA indicates that the business is destroying
shareholder wealth. The EVA value calculated by ICTracker represents the EVA created by the firm for the quarter.
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1. What is the difference between Intellectual Capital, Intangible
Capital and Intangible Assets?
2. Why do you value only the largest stock on each Stock Exchange?
Why not value every listed stock ?
3.1 What is the difference between Intellectual Capital, Intangible
Capital and Intangible Assets?
All three refer to the same thing which is Intellectual
Capital. However different authors refer to this term using any one of these
three terms, hence the confusion. It is compounded by the fact that Intangible Assets
is defined in the Accounting world by the Accounting Standards Board as "an identifiable
non-monetary asset without physical substance held for use in the production of
supply of goods or services, for rental to others, or for administrative purposes."
An asset is defined in the accounting world as "a resource controlled by an enterprise
as a result of past events and from which future economic benefits are expected
to flow to the enterprise." Therefore, an intangible asset needs to be identifiable,
must have an owner and must be able to generate future income. Clearly the Accounting
world's view of Intangible Assets is much narrower than the concept of
Intellectual Capital. Hence IC Tracker avoids using Intangible Assets altogether
to refer to Intellectual Capital, in order to
avoid general confusion.
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The valuation methodology used by icTracker depends on the past financials of the
firm. In our experience, the large stocks representing well established stocks follow
better financial disclosure discipline compared to the rest. Hence icTracker values
these stocks to begin with. Nevertheless, as time passes we will add more and more
stocks to the list of valued stocks in icTracker.
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