The net worth of the company can be calculated from two methods where the first method is to deduct the total liabilities of the company from its total assets and the second method is to add share capital of the company (both equity and preference) and the reserves and surplus of the company.
Net Worth of a Company – You may have heard about this term quite often, don’t you? Especially when the newspapers, business magazines, and finance journals talk about significant individuals and their financial worth!
If you are someone who would like to understand the net worth or wants to find your own net worth, this brief guide will definitely help you.
In simple terms, net worth is the net assets and earnings after deducting all the liabilities and the expenses.
What is Net Worth of a Company?
Net Worth of the company is nothing but the Book value or Shareholders Equity of the firm. Net Worth of the company is the value of the assets after paying off its liabilities like debt.
Please note that net worth is different from “market value” of the company or “market capitalization.”
Let us take an example of Apple and Amazon. We note that Apple’s Net worth is $134.05 billion, and that of Amazon is $19.2 billion. However, their market capitalization (market value) is 898.5 billion (Apple) and 592.29 billion (Amazon), respectively.
Net Worth of a Company Formula
Net Worth of the company formula = Total Assets – Total Liabilities;
This above is also known as Shareholders’ Equity or the Book Value.
Also, please note that this is different from Tangible Book Value, which also removes the value of intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. such as goodwill, patents, etc.
How to calculate the Net worth of a company?
Mr. A has got hold of the balance sheet of Q Company. But while traveling, Mr. A lost the last part of the balance sheet. So how would he calculate the net worth of a company ABC?
Here’s the remainder of the document.
Balance Sheet of ABC Company
|2016 (In US $)||2015 (In US $)|
|Plant & Machinery||13,00,000||16,00,000|
|Current LiabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.||200,000||2,70,000|
|Long term LiabilitiesLong Term LiabilitiesLong Term Liabilities, also known as Non-Current Liabilities, refer to a Company’s financial obligations that are due for over a year (from its operating cycle or the Balance Sheet Date).||1,15,000||1,40,000|
Here the computation is easy. All Mr. A needs to do is to calculate the Net worth of a company ABC by deducting the total liabilities from the total assets.
|2016 (In US $)||2015 (In US $)|
|Total Assets (A)||61,15,000||61,10,000|
|Total Liabilities (B)||3,15,000||4,10,000|
|Net Worth (A – B)||58,00,000||57,00,000|
How would we interpret the growth or decrease of net worth?
Both for businesses and individuals, assets and liabilities can go down or go up.
If we see that the net worth of a business or an individual has been growing, we can easily say that the increase in the assets and the earnings of the business or the individual has been more than the increase in the liabilities and the expenses or we can also say that the decrease in the assets and the earnings of the business is less than the decrease in the liabilities or the expenses.
Increasing Net Worth of a company Example
Amazon’s Net worth has been increasing continuously over the past 5 years period. This is because they have been able to increase their Assets and earnings over a period of time.
Decreasing Net Worth of a Company Example
Sears Holding, however, is a classic example of the decrease in Net worth over a period of time. Sears has been reporting continuous losses resulting in the negative book value of the firm.
What is net worth from an individual perspective?
Recently, Chris Larsen (co-founder) of cryptocurrency company Ripple has become the fifth wealthiest person in terms of net worth. Now that we understand what net worth is to the company, let us look at how net worth can be calculated in the case of an individual.
From an individual’s perspective, net worth means the difference between how much a person owns and how much she owes.
Let’s take a simple example to illustrate this.
David has a home, a car, and a portfolio of investments. His home is worth $120,000. The car he owns is about $20,000. And the portfolio of investments is $50,000. He has taken a mortgage loan for his home, which is around $60,000, of which he already paid off $10,000. He has also taken a car loan of $10,000. What would be his net worth at this juncture?
This is quite a simple example.
All we need to do is to add up the assets of David and then deduct all the liabilities from that.
- David’s total assets would be = ($120,000 + $20,000 + $50,000) = $190,000.
- There is a twist in this example. It says that out of $60,000 that David has taken as loan, $10,000 is already paid off. That means at this moment his mortgage loan amount is = ($60,000 – $10,000) = $50,000.
- Now, we can add up his liabilities. It would be = ($50,000 + $10,000) = $60,000.
- That means, at this juncture, David’s net growth would be = ($190,000 – $60,000) = $130,000.
Video on How to Calculate Net Worth of a Company?
This has been a guide to Net Worth of a Company, its formula, calculation along with practical examples. If you want to learn more about such accounting topics, you may have a look at these recommended articles –