Rethinking Value: The Growing Importance of Intangibles

Traditional price-to-book valuation understates the economic value of R&D-intensive companies because it excludes much of their accumulated innovation capital.

• Companies increasingly invest in software, technology, intellectual property and research rather than only in factories, machinery and equipment, but accounting treatment captures these intangible investments less fully.
• Osmosis estimates that innovation capital rose from approximately 18% to 32% of total assets across the STOXX US large- and mid-cap universe between 2005 and 2025.
• Annual R&D expenditure relative to cost of goods sold more than doubled over the same period, from around 3% to over 7%.
• NVIDIA illustrates the mechanism: CUDA, launched in 2006, and years of GPU and R&D investment helped position the company to benefit from the later surge in AI and large language models.
• Adjusting book equity for innovation capital produces the largest reductions in average P/B ratios in Health Care, Technology and Consumer Staples, while Energy and Utilities change little.

Takeaway: Systematic value investors should consider innovation-adjusted book value, especially for asset-light and R&D-intensive businesses, although conventional P/B remains useful and the adjustment may reveal opportunities missed by standard metrics.