Net Assets

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What are Net Assets?

The net asset on the balance sheet is defined as the amount your total assets exceed your total liabilities and is calculated by simply adding what you own (assets) and subtracting it from whatever you owe (liabilities). It is commonly known as net worth (NW).

Below is the Net asset Formula

Net Asset = Total Asset - Total Liability

Let us calculate this for Colgate in 2014.

Total Assets in 2014 (Colgate) = $13,459 million
Total Liabilites in 2014 (Colgate) = $12,074 million

Net Assets = Total Assets in 2014 - Total Liabilities in 2014

= $13,459 million - $12,074 million = $1,385 million

What are Net Assets?

Net Assets Example

Your Balance Sheet (the positional statement) is equally balanced between assets and liabilities.

From the above basic account format of the balance sheet, we can observe that the balance sheet is divided into Assets and Liabilities and Shareholders Equity.

If every item on the balance sheet is correctly listed, the Total Assets must equal the Total Liability and Shareholder's Equities.
Remember, our Net Worth equals the difference between Total Assets and Total Liabilities. It leaves us with the Shareholder's Equity.
So we can say that It is similar to Shareholder's Equity.

Increasing Net Assets Example

Amazon's Assets have been increasing continuously over the past five-year period. It is because they have been able to increase their Assets and earnings over some time.

Decreasing Net Assets Example

Sears Holding, however, is a classic example of the decrease in Assets over some time. Sears has been reporting continuous losses resulting in the negative book value of the firm.

Net Assets for Individuals

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 the company's net worth is, let us calculate it in the case of an individual.

source: fortune.com

From an individual's perspective, net assets mean the difference between how much a person owns and how much she owes. To improve your financial health, your assets must be positively high.

Remember, your earnings do not reflect your true financial health. Let’s take the example of two different people to make it clear.

Ram earns Rs 45000/- per month while its expenses and liabilities (like monthly bills, installment of home loan/car loan, credit card liabilities, etc., total a sum of Rs 47000/-). The financial health of Ram is said to be poor, as his Net worth is negative, and nothing is left to invest.
On the other hand, Shyam earns Rs 18000/- per month only. He acquires zero liability and invests most of his income in assets like mutual funds Financial situation of Shyam, without a doubt, is healthier than that of Ram's.

So from the above example, it becomes clear that:

Your financial health is mainly decided by what net worth you own.
Earnings are important to use your earned money to make more money.
Investment in assets helps secure your net worth.

Conclusion

Net assets are a simple way to identify the health of the company and an individual. If your company earnings are increasing, but your assets are also decreasing, your company's health might not be improving.