What forces cause a company to write down goodwill?
To understand the answer we first have to understand what Goodwill is. Goodwill in a companies balance sheet is an intangible asset that represents the extra value because of a strong brand name, good customer relations, good employee relations and any patents or proprietary technology. An article from The Economist explains this very well and actually talks about Time Warner directly - The goodwill, the bad and the ugly When one firm buys another, the target’s goodwill—essentially the   premium paid over its book value—is added to the combined entity’s   balance-sheet. Goodwill and other intangibles on the books of   companies in the S&P 500 are valued at $2.6 trillion, or 10% of their   total assets, according to analysts at Goldman Sachs. As the economy deteriorates and more firms trade down towards (or even   below) their book value, empire-builders are having to mark down the   value of assets they splashed out on in rosier times. A recently   announced $25 billion goodwill charge is expected to push Time Warner   into an operating loss for 2008, for instance. Michael Moran of   Goldman Sachs thinks such hits could amount to $200 billion or more   over the cycle. Investors have so far paid little attention to   intangibles, but as write-downs proliferate they are likely to become   increasingly wary of industries with a high ratio of goodwill to   assets, such as health care, consumer goods and telecoms. How bad things get will depend on the beancounters. American firms   used to be allowed to amortise goodwill over many years. Since 2002,   when an accounting-rule change ended that practice, goodwill has had   to be tested every year for impairment. In this stormy environment,   with auditors keener than ever to avoid being seen to go easy on   clients, companies are being told to mark down assets if there is any   doubt about their value. The sanguine point out that this has no effect on cashflow, since such   charges are non-cash items. Moreover, some investors take goodwill   write-offs with a pinch of salt, preferring to look past such   non-recurring costs and accept the higher “normalised” earnings   numbers to which managers understandably cling. The largest companies   are thus able to survive thumping blows that might otherwise floor   them, such as the $99 billion loss that the newly formed but   ill-conceived AOL Time Warner, as it then was, reported for 2002. But   the impact can be all too real, as write-downs reduce overall book   value and increase leverage ratios, a particular concern in these   debt-averse times.
"To my knowledge, there's no universal equation, so this could vary by individual/company.   The equation I use (outside of sentiment measurement) is the below - which carries its own risks: This equations assumes two key points: Anything over 1.2 is considered oversold if those two conditions apply.  The reason for the bear market is that that's the time stocks generally go on ""sale"" and if a company has a solid balance sheet, even in a downturn, while their profit may decrease some, a value over 1.2 could indicate the company is oversold. An example of this is Warren Buffett's investment in Wells Fargo in 2009 (around March) when WFC hit approximately 7-9 a share.  Although the banking world was experiencing a crisis, Buffett saw that WFC still had a solid balance sheet, even with a decrease in profit.  The missing logic with many investors was a decrease in profits - if you look at the per capita income figures, Americans lost some income, but not near enough to justify the stock falling 50%+ from its high when evaluating its business and balance sheet.  The market quickly caught this too - within two months, WFC was almost at $30 a share. As an interesting side note on this, WFC now pays $1.20 dividend a year.  A person who bought it at $7 a share is receiving a yield of 17%+ on their $7 a share investment. Still, this equation is not without its risks.  A company may have a solid balance sheet, but end up borrowing more money while losing a ton of profit, which the investor finds out about ad-hoc (seen this happen several times).  Suddenly, what ""appeared"" to be a good sale, turns into a person buying a penny with a dollar.  This is why, to my knowledge, no universal equation applies, as if one did exist, every hedge fund, mutual fund, etc would be using it. One final note: with robotraders becoming more common, I'm not sure we'll see this type of opportunity again.  2009 offered some great deals, but a robotrader could easily be built with the above equation (or a similar one), meaning that as soon as we had that type of environment, all stocks fitting that scenario would be bought, pushing up their PEs.  Some companies might be willing to take an ""all risk"" if they assess that this equation works for more than n% of companies (especially if that n% returns an m% that outweighs the loss).  The only advantage that a small investor might have is that these large companies with robotraders are over-leveraged in bad investments and with a decline, they can't make the good investments until its too late.  Remember, the equation ultimately assumes a person/company has free cash to use it (this was also a problem for many large investment firms in 2009 - they were over-leveraged in bad debt)." OK, looking at the balance sheet they have $42M in cash, but that is down from $325M in December. Meanwhile their debt has increased from $1.756B in December to $1.832B as of June so their net cash has dropped by $355M in only 6 months. It looks like they spent $329M (give or take) buying other companies in those 6 months. Otherwise their working capital (an important measure of the ability to run the business) looks OK at $230M. Looking at the income statement, they are making money: $70.6M in the last quarter on revenue of $226.7M, which is quite remarkable however they had an unusual item which increased earnings somewhat. Otherwise their earnings would have been about $39M, which is still pretty healthy.  All in, the company itself looks healthy and on a bit of a buying binge, growing through acquisition. I don’t like the debt load but that is probably usual for the industry.  When companies grow through acquisition they generally plan to reduce total employment because of redundancies because you sort of get economies of scale. This usually factors into the decision to buy the company: you increase revenues through the purchase and reduce costs by eliminating employees. This is typically how they “sell” an acquisition to investors.  If I was to guess (and it would only be a guess) this company has a team which looks at the employees of the company it just bought and decides where to downsize. It may not downsize from the newly acquired company but from its own existing employees for a variety of reasons. So most likely that is what you were a victim of: it wasn’t because the company was struggling, or because you were necessarily not a good employee. It is a process, albeit sometimes unfair, and you were a victim of it.  The layoff decisions are not always prudent and it can be hard to understand why a particular group was cut instead of another one. Management doesn’t always make the right call. The broadcast industry has been going through consolidation (companies buying companies) for some time now. Most likely management is hoping to “bulk up” to make it harder for another company to buy it and/or to get a better price when it is bought.   So in summary, most likely they are doing this for reasons of greed, ie, they’ll make more money with fewer employees. Sorry about your situation. You guys seem to have forgotten the most important part of this equation ... i work for a bank and I can tell u this as a painful fact ... every business is governed by its paperwork ... articles bylaws operating agreements amendments and minutes .. if a companys paperwork says that the 51% owner can fire everyone and move to Alaska and that paperwork is proper (signed and binding) it is with minimal excavation law... case in point every company is different .. and it is formed and governed by its paperwork. "Can anyone explain why the analyst is writing off goodwill, please?  I would have thought that the HP brand would be worth something for some years to come, that some section of the market will continue saying ""well, it's an HP laptop, it must be decent quality"" and ""you can rely on HP printers"" for the foreseeable future. Or is that something else?" "The difficulty is that you are thinking of a day as a natural unit of time.  For some securities the inventory decisions are less than a minute, for others, it can be months.  You could ask a similar question of ""why would a dealer hold cash?"" They are profit maximizing firms and, subject to a chosen risk level, will accept deals that are sufficiently profitable.  Consider a stock that averages 1,000 shares per day, but for which there is an order for 10,000 shares.  At a sufficient discount, the dealer would be crazy not to carry the order.   You are also assuming all orders are idiosyncratic.  Dividend reinvestment plans (DRIP) trigger planned purchases on a fixed day, usually by averaging them over a period such as 10 days.  The dealer slowly accumulates a position leading up to the date whenever it appears a good discount is available and fills the DRIP orders out of their own account.  The dealer tries to be careful not to disturb the market leading up to the date and allows the volume request to shift prices upward and then fills them." If this is a publicly traded company, I'd be thinking the shareholders should take a long hard look at this.  This is a man who hates his employees more than he likes money.  A spite-based decision is obviously going to be inferior to a money-based decision.  And shareholders want money. I appreciate it. I didn't operate under selling the asset year five but other than that I followed this example. I appreciate the help. These assignments are just poorly laid out. Financial management also plays on different calculation interactions  so it is difficult for me to easily identify the intent at times. Thanks again. The primary drivers of cash flow in a software firm is the productivity and skill of your employees. How is that reflected in a balance sheet? Well, take a company like Adobe or Salesforce, or even Microsoft.  What would you be able to tell about each from their balance sheets? You can look at their cash level, and what else would matter? "I heard today while listening to an accounting podcast that a balance sheet... can be used to determine if a company has enough money to pay its employees.  The ""money"" that you're looking at is specifically cash on the balance sheet. The cash flows document mentioned is just a more-finance-related document that explains how we ended at cash on the balance sheet.   ...even looking for a job This is critical, that i don't believe many people look at when searching for a job. Using the ratios listed below can (and many others), one can determine if the business they are applying for will be around in the next five years.   Can someone provide me a pair of examples (one good)? My favorite example of a high cash company is Nintendo. Rolling at 570 Billion USD IN CASH ALONE is astonishing. Using the ratios we can see how well they are doing.  Can someone provide me a pair of examples (one bad)? Tesla is a good example of the later on being cash poor.   Walk me though how to understand such a document? *Note: This question is highly complex and will take months of reading to fully comprehend the components that make up the financial statements. I would recommend that this question be posted completely separate." Well it would appear that you had a wash sale that canceled out a loss position.  Without seeing the entire report, I couldn't tell you exactly what was happening or how you triggered § 1091.  But just from the excerpted images, it appears as though your purchase of stock was layered into multiple tranches - perhaps you acquired more of the stock in the 61-day period than you sold (possibly because of a prior holding).   If in the 61-day period around the sale of stock (30 days before and 30 days after), you also acquire the same stock (including by contract or option), then it washes out your loss.  If you held your stock for a while, then in a 61-day period bought more, and sold some, then any loss would be washed out by the acquisition.  Of course it is also a wash sale if your purchase of the stock follows your sale, rather than precedes it.  Your disallowed loss goes into the basis of your stock holding, so will be meaningful when you do have a true economic sale of that stock. From IRS Pub 550: A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, Acquire substantially identical stock or securities in a fully taxable trade, Acquire a contract or option to buy substantially identical stock or securities, or Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale. Looking at your excerpted account images, we can see a number of positions sold at a loss (sale proceeds less than basis) but each one is adjusted to a zero loss.  I suspect the fuller picture of your account history and portfolio will show a more complicated and longer history with this particular stock.  That is likely the source of the wash sale disallowed loss notations. You might be able to confirm that all the added numbers are appearing in your current basis in this stock (or were reflected upon your final exit from the stock). The reason is because there's basically no incentive for anyone to not be unrealistically optimistic (aka lie). The management wants to show its being active so they aren't replaced. The IB trying to sell a company wants to make it look as good as possible. The bank providing a loan for the acquisition needs to make it look good for their risk committee, so they won't try to sour down the claims in the CIM too much. The acquired company would rather make more money than less. The only person who loses is the shareholder. It's an agency problem. "As you pointed out in reference to cost-cutting, fiduciary lawsuits come out when things go wrong. When directors successfully increase stock value, everyone including shareholders is happy.   I'm not sure exactly where the best place is to look for such cases, but here's what my google-fu yielded:  * [Example 1](http://www.nytimes.com/1993/11/25/business/the-media-business-excerpts-from-ruling-in-paramount-case.html): Paramount is sold to Viacom at a lower price than QVC's offer, shareholders sue. Paramount claims they were looking out for long-term but shareholders sued them for screwing them out of maximal share value.  * [Example 2](http://www.professorbainbridge.com/professorbainbridgecom/2012/05/case-law-on-the-fiduciary-duty-of-directors-to-maximize-the-wealth-of-corporate-shareholders.html): Dodge v. Ford Motor Co, Ford had a majority share in his company and wanted to stop paying dividends to shareholders so he could expand his business. At trial Ford ""testified to his belief that the company made too much money and had an obligation to benefit the public and the firm’s workers and customers."" The court disagreed, as his motor company was set up for profit, not charity. Ford was ordered to resume paying dividends.  Interestingly I found many more lawsuits where corporations sacrificed long-term for short-term. It seems once incorporated this is where the internal incentives and pressures lead many managers, lawsuits are merely one of these pressures." P/E is the number of years it would take for the company to earn its share price.  You take share price divided by annual earnings per share.  You can take the current reported quarterly earnings per share times 4, you can take the sum of the past four actual quarters earnings per share or you can take some projected earnings per share. It has little to do with a company's actual finances apart from the earnings per share.  It doesn't say much about the health of a company's balance sheet, and is definitely not an indicator for bankruptcy.  It's mostly a measure of the market's assumptions of the company's ability to grow earnings or maintain it's current earnings growth.   A share price of $40 trading for a P/E ratio of 10 means it will take the company 10 years to earn $40 per share, it means there's current annual earnings per share of $4.  A different company may also be earning $4 per share but trade at 100 times earnings for a share price of $400.  By this measure alone neither company is more or less healthy than the other.  One just commands more faith in the future growth from the market. To circle back to your question regarding a negative P/E, a negative P/E ratio means the company is reporting negative earnings (running at a loss).  Again, this may or may not indicate an imminent bankruptcy.  Increasing balance sheet debt with decreasing revenue and or earnings and or balance sheet assets will be a better way to assess bankruptcy risk. My grandfather owned a small business, and I asked him that very question.  His answer was that year-end closeout is very time-consuming, both before and after  EOY (end of year), and that they didn't want to do all that around Christmas and New Year. The 10-K language is very specific. And as someone that has worked w/ securities attorneys to write these things, I know it is worded like that for a reason. Regardless, to have that risk factor in there and not disclose executives leaving is really shoddy disclosure.