by Net worth is the value of the assets a person or corporation owns, minus the liabilities they owe. It is an important metric to gauge a company’s health, providing a useful snapshot of its current financial position.
Your net worth, quite simply, is the amount of your assets minus all your debts. You can calculate your net worth by subtracting your liabilities (debts) from your assets. If your assets exceed your liabilities, you will have a positive net worth. Conversely, if your liabilities are greater than your assets, you will have a negative net worth.
The term “net worth” refers to the book value of the equity owned by shareholders of a company. It can also be seen as the net value of a company that can be claimed by its shareholders in case all its assets have been liquidated and all its debts are repaid. In other words, it is the dollar amount of assets left after all the liabilities have been paid off. The net worth of a company is also known as stockholder’s equity and shareholder’s equity.
Your tangible net worth is similar to your net worth in that it totes up your assets and liabilities, but it goes one step farther. It subtracts the value of any intangible assets, including goodwill, copyrights, patents and other intellectual property.
Businesses, for example, calculate tangible net worth to determine the liquidation value of the company if it were to cease operations or if it were to be sold. This figure can also be important to individuals who are applying for personal or small business loans, and the lender demands a “real” net worth figure. Your lender may be interested in your tangible net worth because it provides a more accurate view of your finances and how much the lender could recoup if it had to liquidate your assets if you defaulted on their loan.
Tangible Net Worth = Total Assets−Liabilities−Intangible Assets
| Total Assets | Total Liabilities | Value of Intangible Assets |
| Cash and cash equivalents
Investments
Real property
Personal property
|
Secured liabilities – auto, mortgage, home equity loans, etc.
Unsecured liabilities – credit cards, medical, student and personal loans, taxes, etc. |
Goodwill
Patents
Trademarks
Intellectual property
Other IP |
Net Worth in business
In business, net worth is also known as book value or shareholders’ equity. The balance sheet is also known as a net worth statement. The value of a company’s equity equals the difference between the value of total assets and total liabilities. Note that the values on a company’s balance sheet highlight historical costs or book values, not current market values.
Lenders scrutinize a business’s net worth to determine if it is financially healthy. If total liabilities exceed total assets, a creditor may not be too confident in a company’s ability to repay its loans.
A consistently profitable company will register a rising net worth or book value as long as these earnings are not fully distributed to shareholders as dividends. For a public company, a rising book value will often be accompanied by an increase in the value of its stock price.
Net Worth in personal finance
An individual’s net worth is simply the value that is left after subtracting liabilities from assets.
Examples of liabilities, otherwise known as debt, include mortgages, credit card balances, student loans, and car loans. An individual’s assets, meanwhile, include checking and savings account balances, the value of securities such as stocks or bonds, real property value, the market value of an automobile, et al. Whatever is left after selling all assets and paying off personal debt is the net worth.
Calculating Liabilities
Liabilities include any financial obligations that need to be repaid. It can include loans, mortgages, rent, or bills. When calculating liabilities, take the repayments that are currently outstanding not something that will be due in the near future.
For example, if we are computing the net worth of an individual at the end of the year, and they pay their utility bill each month, we will only take the amount due for that month (say December) and not include subsequent amounts for January or February of next year.
