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Consider Novell's latest balance sheet:
We see that intangible assets decreased from $36.351 million to $10.8 million. Because purchases and dispositions impact the accounts, it is not enough to check increases or decreases. For example, Novell's goodwill increased, but that could be due to a purchase. Similarly, it is possible that the decrease in intangible assets could be the result of a disposition, but this is unlikely as it is difficult to sell an intangible by itself.
A careful look at the footnote explains that most of this intangible asset decline was due to impairment. That is, a previously acquired technology has not generated the revenues that were originally expected:
During the third quarter of fiscal 2003, we determined that impairment indicators existed related to the developed technology and trade names we acquired from SilverStream as a result of unexpected revenue declines and the evident failure to achieve revenue growth targets for the exteNd products. Based on an independent valuation of these assets, we recorded a $23.6 million charge to cost of revenue to write down these assets to estimated fair value, which was determined by the net present value of future estimated revenue streams attributed to these assets.
Summary
You have to be careful when you examine the long-lived assets. It is hard to make isolated judgments about the quality of investments solely by looking at measures such as R&D as a percentage or capital expenditures as a percentage of sales. Even useful ratios such as ROE and ROA are highly dependent on the particular accounting methods employed. For example, both of these ratios count assets at book value, so they depend on the depreciation method.
You can, however, look for trends and clues such as the following:
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The method of depreciation and the pattern of investment - Is the company maintaining investment(s)? If investments are declining and assets are aging, are profits distorted?
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