Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Knowledge Capital

What it is:

Knowledge capital, also called intellectual capital, is the intangible asset that represents valuable ideas, methods, processes and other intuitive talents that belong to a company.

How it works (Example):

Some of the most famous capital is knowledge capital: the secret formula for Coca-Cola or the Colonel's chicken, the design behind the next iPhone, the patent for the Chia Pet, the trademark for the Nike "swoosh" or the code for the next "Call of Duty" video game. These assets all produce significant revenue, and they are all the product of research, trial and error, hard work, and talent, but you can't touch them.

Knowledge capital largely relies on the talents of people rather than the work of machines, which means  companies that want to grow and maintain knowledge capital must grow and maintain talent in their employees.
 

Why it Matters:

Knowledge capital can give companies significant competitive advantages. It is hard for competitors to replicate, and it has a long life. For some companies, knowledge capital can be the bulk of the company's asset base or revenue stream.

Like most assets, knowledge capital can lose value as it ages; that is, it amortizes (depreciation is the term used when referring to tangible assets). The rate at which a company chooses to amortize intangible assets may result in a book value that differs from the current market value of the assets. Although the Financial Accounting Standards Board, the Securities and Exchange Commission, and other regulatory bodies define how and when a company’s assets are reported, companies may employ a variety of accepted methods for recording, depreciating and disposing of assets, which is why analysts must also carefully study the notes to a company’s financial statements.