A new analysis of S&P 500 companies shows a clear pattern: businesses with high levels of goodwill and intangible assets tend to underperform both financially and in the market.

The difference is not small, it is consistent.

Companies with high goodwill reported much lower profitability, with EBIT margins far below peers. In 2023, these firms averaged around 5.7% margins, compared to over 20% for companies with more balanced balance sheets.

At the same time, market performance tells a similar story.

  • Returns were significantly weaker over five years
  • Valuations were lower, showing investor skepticism
  • Risk levels were similar, meaning investors got worse returns without taking less risk

What is goodwill and why it matters

Goodwill appears when companies pay more than the actual value of assets during acquisitions. It reflects expectations like: Future growth, Brand value, Customer relationships

The problem is that these values are not directly measurable and depend heavily on assumptions.

Why these companies struggle

The research points to a simple issue: companies often overpay for acquisitions. This can happen for several reasons:

  • Executives overestimate future synergies
  • Competitive bidding pushes prices too high
  • Integration challenges reduce expected benefits

When that happens, the extra cost stays on the balance sheet as goodwill, even if the real value does not materialize.

A hidden risk for investors

There is also an accounting problem. Companies are supposed to reduce goodwill if its value drops, but in practice:

  • Write-downs are often delayed
  • Management has flexibility in valuation
  • Losses can stay hidden for years

This creates a gap between the reported value and real performance. The takeaway is straightforward. Not all assets are equal, and some may be overstated. Companies growing through acquisitions may look strong, but the data suggests investors should be cautious.

In many cases, high goodwill is not a sign of strength, but a warning signal.

Related: Banks Launch New Tool to Bet on Private Credit Risk

Disclosure: This article does not represent investment advice. The content and materials featured on this page are for educational purposes only.