easy · Corporate Credit Analysis

An analyst is assessing an issuer's 'Tangible Net Worth'. If the company has $5 billion in book equity and $4 billion in goodwill from a recent acquisition, what is the most important takeaway?

1. The credit cushion is much thinner than book equity suggests, as $4 billion of the assets have zero value in a liquidation.
2. The firm is highly profitable, because goodwill signals a high ROE being generated by the recently acquired business unit.
3. The firm's leverage is actually lower than it appears, since goodwill reflects durable brand value and competitive moat of the issuer.
4. Goodwill should be added back into EBITDA when computing leverage, since it reflects the expected synergistic growth from the acquisition.

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