Intellectual Capital in its simplest form refers to all the intangible capital of a company. However it is a term that has been defined differently by different authors who are considered experts in this field.
Perhaps all the definitions together does convey the correct picture to the reader. To be sure, IC Tracker has put together the following picture to make the meaning of Intellectual Capital absolutely clear to its users.
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 refelcted by the fact that the Market Cap of most companies is a multiple of its Net Worth. Back to Top of the Page
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 (nearabouts) the same date, thus making the comparison highly meaninghful. Since the share price of the company fluctuates hevaily during trading hours, the market cap of the company fluctuates accordingly. Back to Top of the Page
Intrinsic Worth refers to the true value of a company. It is determined by adding the Intellectual Capital to the Net Worth of the company. Back to Top of the Page
Long Term Growth refers to the expected Long term grorth rate of the company in question, typically the growth rate after the 10th year. This rate should be influenced by the maturity of the Company as well as the Industry that it operates in. For e.g New companies in new industries should clock high growth rates while mature companies in mature industries should clock relatively low growth rates. IC Tracker assigns a default growth rate to every company based on the available broker research, ehich if not available, it defaults to a growth rate of 6%. Since this growth rate can be subjective, IC Tracker allows the user to change the Long term Growth rate manually and recalculate the Intellectual Capital of the Company with the new Growth rate. Back to Top of the Page
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. Since this default discount rate can be subjective, IC Tracker allows the user to change the Discount rate manualy and recalculate the Intellectual Capital of the Company with the new Discount rate. Back to Top of the Page
Liquidity Premium refers to a percentage that reflects how liquid a company's stock is compared to another stock. In general, the assumption here is that the liquidity of a stock is direclty proportional to the free-float percentage. Free-float refers to the percentage of the company's shares that are available in the stock market for trading. It is calculated by deducting the locked-in shares, such as those held by promoters and Govermnent Institutions, from the total otustanding shares of the company. By default, IC Tracker sets the Liquidity Premium of the Company as 1/10th of its Free Float percentage(as calculated from data available from its latest financial statements or from data published by Stock Exchanges). Since this Liquidity Premium rate can be subjective, IC Tracker allows the user to change the Liquidity Premium rate manually. Liquidity Premium does not have any effect on the IC calculation. It is used only for discounting the Actual Stock Price and the Closing Stock Price for a more realistic comparison of these values with the Intrinsic Stock Price. Back to Top of the Page
MVToIV refers to the ratio of the Market Cap to the Intrinsic Worth of the Company. A value of greater than 1 indicates that the company's stock is overvalued whereas a value of 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. Back to Top of the Page
K Basis refers to the Knowledge Basis of the Company. It is computed by dividing the Intellectual Capital of the company by its Net Worth. The K Basis is a very important ratio, since it can be used to determine which company is relatively more knowlegde 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. Back to Top of the Page
IC Margin is short for the Intellectual Capital Margin of the Company. It is computed by dividing the Intellectual Capital by the average anuual Sales (both past and Forecasted) of the Company. A high value of IC Margin indicates that the Intellectual Capital of the company is not contributing to Sales - hence everything else being equal a low value of IC Margin is desirable. Back to Top of the Page
IC Op Margin is short for the Intellectual Capital Operating Margin of the Company. It is computed by dividing the Intellectual Capital by the average anuual EBITDA (both past and Forecasted) of the Company. A high value of IC Op Margin indicates that the Intellectual Capital of the company is not contributing to Operating Profits - hence everything else being equal a low value of IC Op Margin is desirable.Back to Top of the Page
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. Back to Top of the Page
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. IC Tracker reports both the actual value of the stock price on this date as well as the price discounted for Liquidity Premium. Back to Top of the Page.
Latest Stock Price refers to the latest available closing market price of the company's stock. IC Tracker reports both the actual value of the stock price as well as the price discounted for Liquidity Premium. Back to Top of the Page
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 12 quarters of income data for calculating the Intellectual Capital of the company using the Intellectual Capital Valuation Methodology. Back to Top of the Page
IC Tracker uses the Past Financials to forecast the income data for the next 12 quarters. Refer FAQ 4.2 to understand how IC Tracker generates the forecast data. The forecasted financials are then used along with the Past Financials for calculating the Intellectual Capital of the company using the Intellectual Capital Valuation Methodology. This works very well except for the following 2 exceptions:
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. Back to Top of the Page
Total Income or "Gross Income" is computed by adding together Sales revenues and Other Income, which typically includes Interest Income, Rental Income, etc. Back to Top of the Page
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. Back to Top of the Page
PBDT is short for "Profit Before Depreciation and Tax". It is calculated by deducting Interest expenses from EBITDA. Back to Top of the Page
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 expensess, 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. Back to Top of the Page
PAT is short for "Profit After Tax". It is also sometimes referred to as "Net Income". 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. This measure is also used to calculate Earnings Per Share. It is often referred to as "the bottom line". Back to Top of the Page
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 suppy 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. Back to Top of the Page
IC Tracker generates the future financials of the company in one of two different ways.
Where Broker Research is available for the company in question, IC Tracker uses such research to generate the financial forecast for the next three years. For the next seven years and also where Broker Rearch is not available, IC Tracker uses linear regression to predict future financials. Admittedly, these forecasts will not be accurate, however the calculcation methodology uses the Average Earnings numbers of both the past and the present which lessens the error present in the forecast. Back to Top of the Page
Many a time the past financial of a company is not available, perhaps because the company may not yet have commenced operations. In such cases, IC Tracker is unable to generate the Financial Forecast as well. Consequently, the Intellecutal Capital of such companies cannot be calculated. Back to Top of the Page
