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Learn how the brand equity ratio measures the value of a company’s brand relative to its overall worth and why it matters for long-term market positioning.
The Brand Equity Ratio evaluates how much of a company’s total value can be attributed to its brand. It highlights the strength of brand perception and its financial impact on a firm’s market performance. A strong ratio signifies that the brand name itself adds substantial worth, while a lower ratio implies limited influence of branding on company value.
There is no single formula for measuring brand equity, but several recognised approaches are used in valuation and corporate finance.
Some of the most common methods include:
Price Premium Method: Compares branded product prices against generic alternatives.
Income Approach: Estimates the future earnings attributable to the brand.
Cost-Based Approach: Calculates brand value based on marketing and development costs incurred over time.
Market Approach: Compares brand valuations with similar companies or market transactions.
Each method offers a unique perspective, depending on whether the focus is marketing performance or financial contribution.
The general formula for the Brand Equity Ratio is:
Brand Equity Ratio = Brand Value ÷ Total Business Value × 100
Where:
Brand Value represents the financial worth of the brand (often derived from valuation studies or intangible asset assessments).
Total Business Value includes both tangible and intangible assets such as equity, debt, goodwill, and market capitalisation.
This ratio reveals what percentage of a company’s value stems directly from its brand strength.
Let’s consider a company with a total business value of ₹1,000 crore and a brand valuation of ₹250 crore.
Brand Equity Ratio = (₹250 crore ÷ ₹1,000 crore) × 100 = 25%
This means that 25% of the firm’s overall worth is attributed to its brand — a sign of strong consumer trust and competitive differentiation.
Companies with well-known brands like FMCG leaders or luxury manufacturers typically show higher ratios, reflecting brand-driven profitability and pricing power.
A higher Brand Equity Ratio indicates strong brand influence, customer loyalty, and perceived value. Businesses can use this ratio for:
Valuation and M&A: Assessing intangible asset worth during mergers or acquisitions.
Investment Analysis: Estimating how much of shareholder value is brand-dependent.
Marketing ROI: Measuring the return on long-term brand-building efforts.
Benchmarking: Comparing brand contribution across products or competitors.
However, brand valuation often includes assumptions about consumer behaviour, so ratios should be reviewed alongside qualitative market insights.
The Brand Equity Ratio quantifies how much of a company’s success is driven by its brand. It serves as an essential link between marketing performance and financial valuation. While high ratios highlight brand-driven growth, analysts should combine these insights with profitability and cash flow data for balanced evaluation.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
The brand equity ratio shows the proportion of a company’s total value that comes from its brand. A higher ratio suggests strong brand recognition, pricing power, and customer loyalty contributing significantly to overall enterprise value.
Yes, a negative ratio can occur when brand value is impaired or liabilities outweigh intangible assets. This may happen in cases of reputational damage, declining consumer trust, or poor market performance.
The ratio is usually evaluated during mergers, acquisitions, brand audits, or investor presentations. It helps stakeholders understand the brand’s financial contribution and assess how effectively it drives long-term enterprise value.
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Posted on 19 Dec
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