Home > Uncategorized > The value of a good name

The value of a good name

Screen-shot-2014-11-25-at-14.35.04This fascinating article highlights how a declining reputation can severely affect the value of a business and can actually be measured.

They have certainly picked a very good example and consider this

“At its peak in late 2011, Tesco’s market cap was around £32.2bn, half of which – £16.6bn – was the value of its reputation. By September 2014, its cap had dropped to £18.6bn, only £2.6bn of which was the value of its reputation”.

That is quite extraordinary but you can certainly see the basis of the measurement. In effect it is the residue value of the shares once the tangibles have been stripped out (I am assuming). This does in fact make perfect sense because a share price is a bet on the future and analysis of Tesco’s future is generally less than flattering. Not perhaps unexpected but what is significant is the sheer scale of the fall

In a roundabout way this does lead us to consider the most controversial of balance sheet items. Intangible assets, which are frequently little more than the perceived value of the brand. Clearly it could be argued that there is a direct link between a stock market valuation and the a book valuation, simply because the number is precisely what an independent source is telling us its value is. But is this so? And what of businesses that are not publicly quoted?

However the main lesson is how fragile a business’s reputation is. Tescos are rightly held up as a bad example but they are hardly alone whilst on the other hand certain businesses have fight to maintain a good name be it relatively fashionable and forward looking such as Apple or maybe Zara or established but strongly ethical such as GE or Sony maybe.

The one certainty is that there is certainly value in doing so

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