Goodwill is the value of a company in excess of its assets. If the Coca-Cola Company purchases XYZ Company for a price that exceeds XYZ Company's book value, the excess is recorded as Goodwill. If Goodwill is increasing over the years that could mean the company is purchasing other great companies
Let's say Coca-Cola purchases XYZ Company for $150 million. And XYZ Company's book value is $100 million. Goodwill would be:
Goodwill = $150 million - $100 million = $50 million
A great company will always sell for more than its book value. However, there are times and economic conditions when a great company will be undervalued and sell for less than its book value. When that happens, it would be like getting something worth $100 dollars for $75 dollars.
Check if Goodwill has increased annually, then find out what companies are being purchased by using Google. Research the companies being purchased to see if they have a Durable Competitive Advantage.
Example
Company: Coca-Cola
Date: January 2015
In the Balance Sheet, Coca-Cola's Goodwill has increased from the years 2009 to 2010; Goodwill has increased from $4.2 billion to $11.7 billion.
To find out what companies the Coca-Cola Company has purchased, Google the following keywords:
- Coca Cola Purchase Company
- Coca Cola Purchase Corporation
- Coca Cola Buys Company
- Coca Cola Buys Corporation
- Coca Cola Acquires Company
- Coca Cola Acquires Corporation
Google search results for keywords "coca cola acquires company":
Source: Google
According to the search results above, Coca-Cola purchased 3 companies that could have a Durable Competitive Advantage:
- Grupo Industrias Lacteas - maker of dairy and juice products in Latin countries; in these countries, they are in an industry with very little competition.
- Honest Tea - maker of organic low sugar beverages; they sell a unique product that caters to people who prefer organic foods.
- Glaceau - maker of Vitamin Water; they sell a unique product that caters to the health conscious customer.