Forum Archive Index - December 2000

[James Maxwell <jcmaxwellnz@yahoo.com>]

When goodwill is amortized (in other words
depreciated) it is not deducted from profits.

It is a non-cash transaction and the goodwill
deduction is made from shareholder equity.

Some people occasionally suggest that, since it is a
non-cash deduction, goodwill amortization can be
ignored when assessing a company.  That is not true. 
Shareholder equity is that part of a company over
which shareholders have a claim.  If this is eroded,
the shareholders' value in the company is also eroded.
 The easiest way to see the erosion of shareholder
value in such a situation might be to look at the debt
to equity ratio.  As equity is eroded, the debt to
equity ratio worsens.

JCM.

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