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 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 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.
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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.
- 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 –
