By: Ramesh Jude Thomas, Founder & Director of Equitor Value Advisory

Three decades ago, valuing a business was straightforward. Around 80% of its worth could be found on the balance sheet, primarily in tangible assets. Back then, creating capacity—whether through technology or infrastructure—was a significant competitive advantage. Limited access to resources or capital meant competitors couldn’t easily replicate this capacity, making it both an asset and a barrier to entry. These tangible assets dominated the balance sheet, leaving just 20% as what we called goodwill—a balancing figure in the books.

Today, this equation has flipped entirely. When assessing a company’s value now, only a small fraction is reflected in its balance sheet. Instead, the balance sheet has become more of a historical record, capturing what once was. The true value of a business lies in its intangible assets—namely, its brand and intellectual property (IP). These assets play a pivotal role in forecasting and determining a company’s future value.

Across industries and economies worldwide, the majority of value now resides in intangible assets. This is an undeniable reality. Yet, balance sheets—the cornerstone of quarterly board meetings—fail to account for 80% of a company’s true value. This gap exists because traditional accounting systems have not evolved to recognize the growing importance of intangible assets.

Leading companies, however, have recognized the shift. They understand that building a sustainable, valuable future means prioritizing and leveraging these intangible assets. But this realization raises an important question: What are the biggest challenges businesses face in recognizing and utilizing these assets effectively?

The first hurdle lies in accounting and reporting systems. These systems fail to capture intangible assets in measurable, material terms. When these assets are not reported, they remain invisible, starting at the board level and filtering throughout the organization. Without recognition, there is no accountability for managing these assets.

Consider the widely used metric “return on capital employed.” The denominator in this calculation is based solely on tangible assets from the balance sheet. But why aren’t brand and IP included? If they were added to the equation, the metric would provide a far more accurate picture of returns. Currently, 80% of the assets driving profits are excluded from the calculation, making the numbers look disproportionately favorable. This disconnect means that much of the profit-driving numerator comes directly from intangible assets, yet it is divided only by tangible capital.

So, what’s the solution? Businesses must take proactive steps, going beyond standard compliance requirements. First, they need to scientifically value their intangible assets. Second, they should report these assets transparently, just as they do with tangible assets. Third, organizations must hold managers accountable for optimizing and integrating these assets into strategic decision-making.

By embracing this approach, companies can transform how they measure return on capital. The metrics won’t just look different; they’ll finally reflect the real value that resides within the business. Recognizing and leveraging intangible assets isn’t just an accounting adjustment—it’s a strategic imperative for businesses that want to thrive in today’s economy.