Formula to Calculate Net Worth of a Company
The net worth formula is used for the purpose of calculating the net worth of the firm i.e., the book value of the total shares held by the equity holders by reducing the total liabilities of the company with the total assets held by the company as on a given date.
Net Worth Calculation (Step by Step)
To do the net worth calculation, one needs to follow the below steps:
- Step 1 – Take the total of all of its assets but sometimes the lender is interested only in knowing the tangible net worth in that case intangibles such as goodwill, patents, etc. need to be avoided from the total of assets.
- Step 2 – Secondly, you should take a total of all the liabilities which the firm is liable to pay which is all of the external sources of finance.
- Step 3 – When you subtract a total of liabilities from the total assets, that resultant figure would be net worth or shareholder’s equity.
- Step 4 – The net worth equation considers what would be left out for the shareholders when all of the assets are used to clear all the external liabilities.
ABC limited reported below numbers for the year ended December 2018. Ying who has a newly learned concept of Net worth wants to do the net worth calculation of ABC limited. You are required to calculate Net Worth based on these figures.
Below is given data for calculation of net worth of the company ABC limited
Therefore, the net worth calculation can be done using the above formula as,
Net Worth of ABC limited will be –
Net Worth of ABC limited = 20000
Federal Bank one of the small banks in the town and is one of the favorite stocks at the moment. The federal bank claims that its net worth has increased and on the verge of decreasing provisions for NPA.
Below is a summary of the financial numbers reported by them.
Net Worth calculation is required for both years and comments whether the claim made by the Federal Bank is correct?
Therefore, the net worth of Mar -17 can be calculated using the above formula as,
=115208.91 – 106266.53
Net Worth of Mar-17 will be –
Net Worth of firm for Mar-17 = 8942.38
Therefore, the net worth of Mar -18 can be calculated using the above formula as,
= 138533.14 – 126322.90
Net Worth of Mar-18 will be –
Net Worth of firm for Mar – 18 = 12,210.24
Hence the claim made by the Federal bank is correct.
Indostar capital finance limited is a non-deposit accepting NBFC which provides loans to SME and offers vehicle and housing finance. Miss Veronica is an equity analyst who wants to filter stock-based upon the firm’s rule and one such rule is that the firm in research should have 25% of a total asset as net worth in order to ensure security. You are required to calculate the net worth and advise if this would make up the list of brokerage firm criteria.
Below is the latest reported balance sheet.
Therefore, the calculation of net worth can be done using the above formula as,
= 729768 – 5160.55
Net Worth of Mar -18 will be –
Net Worth of Firm for Mar – 18 = 2137.13
Total Assets will be –
= 2,137.13 / 7,297.68 * 100
Net Worth /Total Assets = 29.29%
Hence, the firm can be taken into the brokerage list as it fulfills the criteria.
Net Worth Calculator
You can use this net worth calculator
|Net Worth Formula =||Total Assets – Total Liabilities|
|0 – 0 =||0|
Relevance and Uses
The formula of net worth calculates the book value of shareholders’ equity by finding the difference of assets that the company owns and the liabilities which are external debt that has to be repaid by the firm or the company. The result can be either positive or negative.
Net worth is an important concept in the real world whether it is used by investors or lenders or equity analysts or any other finance person. This figure depicts the net value which is left out to shareholders. The figure can be positive or negative. A negative figure means the company is eroding or wiping out the owner’s equity which is a sign of loss-making company.
Lenders sometimes prefer tangible net worth as intangibles are sometimes difficult to value. Further, it is more difficult to find a strategic buyer and hence it will take time for the company to liquidate intangibles in case of bankruptcy. Some analyst uses these figures for comparing book value while conducting the valuation.
This has been a Guide Net Worth Formula. Here we provide step by step guide to calculate the net worth of a company along with practical examples and Excel template downloadable. You can learn more about financial analysis from the following articles –