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.
Definition of Tangible Net Worth
Tangible Net Worth refers to the worth of the company. It includes only tangible assets of physical existence and excludes intangible e.g., 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
Following is the formula:
- Total assets refer to the total number of an asset of the balance sheetAsset Of The Balance SheetAssets in accounting refer to the organization's resources that hold specific economic value and facilitate business operations, meet expenses, and generate cash flow. They create the company's worth and are recorded in the balance sheet.read more. It refers to the total assetThe Total AssetTotal Assets is the sum of a company's current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equityread more 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 assetThe Total AssetTotal Assets is the sum of a company's current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equityread more number of that particular year in the balance sheet.
- 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. read more refer to those assets which are intangible and lack physical substance and existence.
Calculation of Tangible Net Worth (with Example)
Given below is the balance sheet for fiscal 2012-13 of a company in the manufacturing industry. It is in the United States and prepares their finances according to US GAAP. An analyst wants to analyze the balance sheet position of the firm and calculate the tangible net worth of the company.
We have taken liabilities of the company to expect the shareholder equity, retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more, 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.
- Reviewing the net worth statements over time can help a company determine it’s strategic initiatives. It also helps to determine much liquidity does the business has with them to start the initiatives.
Disadvantages
- Tangible Net Worth is a very generic term.
- It is only useful metrics if the company has no other entity in operations or has non-subsidiary, etc.
- It is not a useful method of the valuation if the company is making consecutive losses for more than 3 fiscal years.
Conclusion
Regardless of the financial situation, knowing the tangible net worth can help a company evaluate its current financial health. It also helps plan for the financial future. By knowing where it stands financially, a company will be more mindful of its financial activities. It would be better prepared to make sound financial decisions and more likely to achieve short-term and long-term financial goals.
Recommended Articles
This article has been a guide to Tangible Net Worth and its definition. Here we discuss how to use the formula of tangible net worth for calculation along with practical examples, advantages, and disadvantages. You can learn more about accounting from the following articles –
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