Tangible Net Worth

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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, intangible assets are intellectual property, goodwill, patents, copyrights, etc. Anything that is not physical and cannot be felt or touched is an intangible asset.

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  • 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
  • Total assets refer to the total number of asset of the balance sheet. It refers to the total asset number of that particular year in the balance sheet.
  • Total liabilities refer to the total number of liabilities on the balance sheet. It refers to the total asset number of that particular year on the balance sheet.
  • Intangible Assets refer to intangible assets that lack physical substance and existence.

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. GAAP. 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 equity, retained earnings, 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.

Advantages

  • It is also a valuation method. If the company is making constant profits, we can judge the company's net worth.
  • Calculating it is quite simple.
  • Reviewing the net worth statements over time can help determine its strategic initiatives. It also helps to determine how much liquidity does the business has 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 valuation method if the company makes consecutive losses for more than three fiscal years.

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.