Net Assets

Updated on January 2, 2024
Article byTanmay Agarwal
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What are Net Assets?

The net asset on the balance sheet is defined as the amount your total assets exceed your total liabilities and is calculated by simply adding what you own (assets) and subtracting it from whatever you owe (liabilities). It is commonly known as net worth (NW)Net Worth (NW)The company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and surplus.read more.

Net Assets

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Net Assets (wallstreetmojo.com)

Below is the Net asset FormulaThe Net Asset FormulaThe net asset formula evaluates the company's total assets surplus or deficit over its total liabilities. It determines the company's net worth or value which is an indicator of its financial health.read more

Net Asset  = Total Asset – Total Liability

Let us calculate this for Colgate in 2014.

  • Total Assets in 2014 (Colgate) = $13,459 million
  • Total Liabilites in 2014 (Colgate) = $12,074 million

Net Assets = Total Assets in 2014 – Total Liabilities in 2014

= $13,459 million – $12,074 million = $1,385 million

Net Assets Example

Your Balance Sheet (the positional statement) is equally balanced between assets and liabilities.

Net Assets 1
Net Assets 2
  • If every item on the balance sheet is correctly listed, the Total Assets must equal the Total Liability and Shareholder’s Equities.
  • Remember, our Net Worth equals the difference between Total Assets and Total Liabilities. It leaves us with the Shareholder’s Equity.
  • So we can say that It is similar to Shareholder’s Equity.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Increasing Net Assets Example

Amazon’s Assets have been increasing continuously over the past five-year period. It is because they have been able to increase their Assets and earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more over some time.

Amazon - Increasing Net worth

Decreasing Net Assets Example

Sears Holding, however, is a classic example of the decrease in Assets over some time. Sears has been reporting continuous losses resulting in the negative book value of the firm.

Example 2

Net Assets for Individuals

Recently, Chris Larsen (co-founder) of cryptocurrencyCryptocurrencyCryptocurrency refers to a technology that acts as a medium for facilitating the conduct of different financial transactions which are safe and secure. It is one of the tradable digital forms of money, allowing the person to send or receive the money from the other party without any help of the third party service.read more company Ripple has become the fifth wealthiest person in terms of net worth. Now that we understand what the company’s net worth is, let us calculate it in the case of an individual.

Example

source: fortune.com

From an individual’s perspective, net assetsNet AssetsNet Fixed Assets is a financial metric used to calculate the overall value of a firm’s fixed assets. You can calculate it by deducting the total depreciation or liabilities from the total amount paid for all the fixed assets. read more mean the difference between how much a person owns and how much she owes. To improve your financial health, your assets must be positively high.

Remember, your earnings do not reflect your true financial health. Let’s take the example of two different people to make it clear.

  • Ram earns Rs 45000/- per month while its expenses and liabilities (like monthly bills, installment of home loan/car loan, credit card liabilities, etc., total a sum of Rs 47000/-). The financial health of Ram is said to be poor, as his Net worth is negative, and nothing is left to invest.
  • On the other hand, Shyam earns Rs 18000/- per month only. He acquires zero liability and invests most of his income in assets like mutual funds Financial situation of Shyam, without a doubt, is healthier than that of Ram’s.

So from the above example, it becomes clear that:

  • Your financial health is mainly decided by what net worth you own.
  • Earnings are important to use your earned money to make more money.
  • Investment in assets helps secure your net worth.

Conclusion

Net assets are a simple way to identify the health of the company and an individual. If your company earnings are increasing, but your assets are also decreasing, your company’s health might not be improving.

Recommended Articles

This has been a guide to Net Assets and its definition. Here we discuss examples of Net Assets for a company and an individual, along with a detailed explanation. You can learn more about accounting from the following articles –