Intangible Assets: Investment or Financial Burden?

In a world where innovation and knowledge drive business growth, intangible assets have become critically important. Beyond factories and equipment, the true value of many companies lies in elements that are difficult to measure but essential to their success: patents, trademarks, human talent, R&D management, and the development of strategic networks, among others. These assets not only strengthen competitiveness, but also redefine how companies create and sustain their market advantage.

Although intangible assets represent a key source of differentiation and growth, paradoxically, their impact on profitability is not always positive. In many cases, companies record these assets in their financial statements to comply with accounting standards but fail to manage them strategically to maximize their value. Furthermore, the difficulty in measuring and capitalizing certain intangibles —such as human capital, innovation expenses, or business relationships— can limit their recognition in accounting books and distort their actual impact on business performance.

As suggested in my recent article “Intangible assets and their effects on business performance: an analysis of Colombian companies” (Galician Journal of Economics, 2024), co-authored with Camilo Anzola, Liliana Ruiz, and David Camargo (Universidad Militar Nueva Granada), intangible assets do not always yield high returns for every company. To determine the relationship between intangible assets and financial performance, our study analyzed financial data from over 48,000 Colombian companies between 2005 and 2015.

How Are Intangible Assets Valued?

Intangible assets fall into three categories: human capital (skills, competencies, corporate culture, experience, etc.), structural capital (patents, copyrights, trademarks, databases, etc.), and relational capital (business alliances, stakeholder collaborations, etc.). Their value can be estimated using two main approaches: book value and market value.

From an accounting perspective, intangible assets appear on the balance sheet; however, accounting practices tend to focus on structural capital, such as patents, registered trademarks, licenses, rights, franchises, copyrights, industrial designs, software, and goodwill. In contrast, human or relational capital is usually excluded due to the difficulty of valuing and capitalizing these assets.

Unrecognized intangible assets are assessed differently for publicly traded companies: by calculating the difference between market value and book value. In other words, if a company’s market value exceeds its book value, it is considered to hold hidden value not reflected in the accounting records. However, this could also be the result of market speculation and not necessarily an indication of proper management of intangible assets. For this reason, using publicly traded firms to assess the impact of intangible assets on performance can introduce bias. Nonetheless, most existing studies on the value of intangible assets rely on publicly traded companies because their financial information is more accessible and aligned with standardized accounting practices.

Measuring Intangible Assets Through Book Value

Our study focuses on Colombia, where research on the relationship between intangible assets and profitability has been limited. Given that only a small number of companies are publicly listed, we adopted the book value approach. However, in this context, the lack of standardization in the accounting practices of non-listed firms can influence the results. Therefore, we selected companies that follow the Colombian accounting law.

Using a panel data technique, we found a negative relationship between intangible assets and financial performance (ROA and ROE) among non-listed firms, both in the short and long term. We believe this is related to the fact that many Colombian companies—especially non-listed ones—record intangible assets because they are required to do so by accounting regulations. However, they often use poor valuation practices and fail to implement strategies to leverage these assets effectively.

Although accounting standards require intangible assets to be recorded only when they are expected to generate profitability, it seems that Colombian firms are not using them to achieve positive financial outcomes. It is important to understand that intangible assets do not create value by themselves; they must be combined with other productive factors and a strategy for exploitation. If they are only recorded for compliance purposes, they may negatively affect business performance. One possible explanation for our findings is that in Colombian firms, these assets are capitalized but not strategically exploited to generate benefits.

High Costs and Limited Benefits

Another challenge with intangible assets is the additional costs they can generate, which may be significant in the short and medium term. We only found evidence of benefits in the EBITDA ratio, and only during a specific period. Since our database excluded publicly listed companies, we were able to observe that for small businesses with financial and operational constraints, intangible assets did not yield profits—or at least none that could be traced in the accounting records.

Additionally, the Colombian market may not be fully leveraging intangible assets, as reflected in the country’s low rankings in international innovation indices and the limited investment Colombian companies allocate to creating such assets. Therefore, even when a company develops and records these assets, the likelihood of exploiting them to generate profitability remains low. However, they still generate additional costs that many companies cannot recover, suggesting they should focus on using these assets strategically to create shareholder value or generate returns.

Intangible assets are not inherently harmful; however, companies must understand how they can create value by moving beyond mere accounting registration toward real value creation. For this reason, governments in many developing countries should prioritize policies that promote the effective exploitation of intangible assets through business strategies, rather than merely encouraging the creation of patents and trademarks, which do not always yield profitability.

The author is Professor at the Department of Finance and Business Economics, EGADE Business School.