Tangible Net Worth

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Tangible net worth is the company’s total net worth that does not include the value of the company’s intangible assets like copyrights, patents, etc. It 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 assetsExamples Of Tangible AssetsTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation.read more include real estate, cash, plant and machinery, homes, etc. On the other hand, intangible assetsExamples Of Intangible AssetsSome of the most common intangible assets are logos, self-developed software, customer data, franchise agreements, Newspaper Mastheads, license, royalty, Marketing Rights, Import Quotas, Servicing Rights etc.read more are intellectual property, goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more, patents, copyrights, etc. Anything that is not physical and cannot be felt or touched is an intangible asset.

Key Takeaways

  • Tangible net worth refers to the company’s net worth that includes only tangible assets after deducting liabilities and intangible assets like goodwill, patents, copyrights, and royalties. 
  • It is not a helpful valuation method if the company makes consecutive losses for more than three fiscal years.
  • Knowing the tangible net worth may help the company evaluate its financial position regardless of its economic situation. It may also help in planning for the financial future. 
  • It is only a helpful metric if the company has no other entity in operations or has a non-subsidiary.

Tangible Net Worth Formula

Following is the formula:

Tangible Net Worth Formula = Total Assets – Total Liabilities – Intangible Assets

Tangible-Net-Worth

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How to Calculate Net Worth of a Company Explained in Video

 

Calculation of Tangible Net Worth (with Example)

Below is the balance sheet for fiscal 2012-2013 of a company in the manufacturing industry in the United States. It prepares its finances according to U.S. GAAPGAAPGAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting.read more. An analyst wants to analyze the firm’s balance sheet position and calculate its tangible net worth.

We have taken liabilities of the company to expect the shareholder equityShareholder EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period.read moreretained 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.

Example 1

Solution:

Tangible Net Worth Example 1.1jpg

Tangible net worth can be calculated as follows,

Tangible Net Worth Example 1.4jpg

= $1,680 – $1,195 – $260

Example 1.2jpg

Tangible Net Worth = $225.

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Advantages

Disadvantages

Conclusion

Knowing the tangible net worth can help a company evaluate its current financial health regardless of its economic situation. It also helps plan for the financial future. Knowing where it stands financially will make a company more mindful of its financial activities. As a result, it would be better prepared to make sound financial decisions and more likely to achieve short-term and long-term financial goals.

Frequently Asked Questions (FAQs)

Can tangible net worth be negative?

If a company’s liabilities exceed its assets, its net worth can be negative. In contrast, its net worth will be positive if the assets are more significant than the liabilities, its net worth will be positive.

Why is tangible net worth important?

The tangible net worth is essential because it helps to determine the actual net worth with the help of the tangible assets. In addition, it can be helpful if the company/business wants to evaluate the liquidation value if they ever want to sell or end the business operations.

Does tangible net worth include subordinated debt?

One should not include the subordinated debt while calculating the tangible net worth if the property value on which any company or person holds subordinated debt is insufficient to go off the debt along with the debt payable to prime and senior debt holders.

Recommended Articles

This article has been a guide to Tangible Net Worth and its definition. Here, we discuss its formula for tangible net worth with an example of calculation, advantages, and disadvantages. You can learn more about accounting from the following articles: –

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