Tangible Net Worth is the total net worth of the company that does not include the value of the intangible assets of the company like copyrights, patents etc and is calculated as Total Assets minus total liabilities and intangible assets.
Tangible Net Worth Definition
Tangible Net Worth refers to the worth of the company which includes only tangible assets that are of physical existence and excludes intangible such as patents, copyrights, intellectual property, etc.
Examples of tangible assets include Real estate, cash, plant and machinery, homes, etc. On the other hand, examples of intangible assets are Intellectual property, goodwill, patents, copyrights, etc. Anything that does not have physical existence and cannot be felt or touched is known as an intangible asset.
Tangible Net Worth Formula
The formula is represented as follows,
- Total assets refer to the total number of an asset of the balance sheet. It refers to the total asset number of that particular year in the balance sheet.
- Total Liabilities refers to the total number of liabilities of the balance sheet. It refers to the total asset number of that particular year in the balance sheet.
- Intangible Assets refer to those assets which are intangible in nature and lack physical substance and existence.
Calculation of Tangible Net Worth (with Example)
Given below is the balance sheet for the fiscal 2012-13 of a company in the manufacturing industry and is in the United States who prepare their financial according to US GAAP. An analyst wants to analyze the balance sheet position of the firm and wants to calculate the tangible net worth of the company.
We have taken liabilities of the company to expect the shareholder equity, retained earnings and ESOP’s.
Solution
Tangible Net Worth can be calculated as follows,
= $1,680 – $1,195 – $260
TNW = $225
Advantages
- It is also a valuation method if the company is making constant profits we can judge the net worth of the company.
- Calculating it is quite simple in nature.
- Reviewing your net worth statements over time can help you determine your strategic initiatives and how much liquidity does the business has with them to start the initiatives.
Disadvantages
- It is a very generic term.
- It is only useful metrics if the company has no other entity in operations or has non-subsidiaries or anything then only the measure of it is useful.
- It is not a useful method of valuation if the company is making consecutive losses for more than 3 fiscal years.
Conclusion
Regardless of your financial situation, knowing your tangible net worth can help you evaluate your current financial health and plan for your financial future. By knowing where you stand financially, you will be more mindful of your financial activities, better prepared to make sound financial decisions and more likely to achieve your short-term and long-term financial goals.
Recommended Articles
This has been a guide to Tangible Net Worth and its definition. Here we discuss how the formula of tangible net worth is used for calculation along with practical examples, advantages, and disadvantages. You can learn more about accounting from the following articles –
