Net worth – What net worth?
Net worth is the total value of a person or organisation.
To calculate your net worth, you’ll need to consult your balance sheet. Try Debitoor for free and create up-to-date, accurate balance sheets in seconds.
Net worth can apply to an individual, company, sector, or country. When used to refer to businesses, net worth might also be known as shareholder’s equity or book value.
When to use net worth
Net worth is often seen as a good indication of whether a business is financially stable and healthy, and net worth is therefore used by a number of different stakeholders.
There are three main stakeholders that may be interested in a business’s net worth: the business’s management, the business’s creditors, and potential investors.
For management, net worth can be used to determine whether the business is on track to meet its financial goals and whether they need to make any major changes to the way they run the business.
Creditors may use a business’s net worth to help them understand whether there are any potential issues that might prevent the business from paying back the money they owe.
For potential investors, net worth can be used to assess whether a business is a good investment opportunity.
How to calculate net worth
Assets are items that add value to your business. They can be long term or short term, and they can also be tangible (i.e. physical) or intangible (i.e. non-physical).
To calculate the total value of your assets, you should add the value of your tangible assets to the value of your intangible assets. The value of your assets can be found on your balance sheet, but you might also want to consider having your assets valued in order to get a more accurate estimate.
Liabilities are essentially debts; they represent the money that your business owes to employees, tax agencies, suppliers, investors, or other businesses. Like assets, liabilities can be either long term or short term. Short-term liabilities are paid back within a year, while long-term liabilities paid back over a longer period of time.
To calculate the total value of your liabilities, you should add the value of your long-term liabilities to the value of your short-term liabilities. Again, these values can be found on the balance sheet.
Formula for calculating net worth
Once you’ve got the figures for your total assets and liabilities, you can use the following formula to calculate your net worth:
Assets – Liabilities = Net Worth
This can result in a positive or negative figure, depending on whether the value of your assets is greater than the value of your liabilities or vice versa.
For example, if your total assets are worth £100,000 and your total liabilities are worth £80,000, your business’s net worth would be £20,000, whereas if your total assets are worth £80,000 and your total liabilities are worth £100,000, you would have a negative net worth of -£20,000.
How to interpret net worth
Net worth provides insight into a business’s current financial stability. A positive net worth is generally seen to indicate that a business has healthy, stable finances, as it shows that their assets are worth more than their liabilities. On the other hand, a negative net worth is generally seen to be a cause for concern, as it indicates that a business’s liabilities outweigh their assets.
Furthermore, a decreasing net worth can be a cause for concern among managers, creditors, and investors, as it could indicate that a business is becoming less profitable.
Net worth vs. tangible net worth
Whereas net worth is calculated by comparing a company’s tangible and intangible assets with its liabilities, tangible net worth does not consider the value of a business’s intangible assets.
The main advantage of tangible net worth over regular net worth is that it can be easier to calculate, as it can often be difficult to value intangible assets such as goodwill. On the other hand, tangible net worth could be said to be less accurate than standard net worth, as excluding intangible assets from a business’s valuation could result in the business being undervalued.
For example, some of the largest and most profitable companies are technology companies. While these businesses do have a significant number of tangible assets, a lot of their value can be found in their intellectual property.