Net Worth Formula (Table of Contents)
What is the Net Worth Formula?
The term “net worth” refers to the book value of the equity owned by shareholders of a company. It can also be seen as the net value of a company that can be claimed by its shareholders in case all its assets have been liquidated and all its debts are repaid. In other words, it is the dollar amount of assets left after all the liabilities have been paid off. The net worth of a company is also known as stockholder’s equity and shareholder’s equity. The formula for net worth can be derived by subtracting the total liabilities from the total assets of the subject company. Mathematically, it is represented as,
Examples of Net Worth Formula (With Excel Template)
Let’s take an example to understand the calculation of Net Worth Formula in a better manner.
Net Worth Formula– Example #1
Let us take the example of a company GHJ Ltd. which is engaged in the business of synthetic rubber manufacturing. As per the latest balance sheet of the company, the total assets of the company included accounts receivables of $500,000, inventories of $1,500,000, net fixed assets of $1,000,000 and cash at bank of $50,000, while the total liabilities included trade payables of $300,000 short-term debt of $1,000,000 and term debt of $1,100,000. Calculate the net worth of GHJ Ltd. based on the given information.
Solution:
Total Assets is calculated using the formula given below
Total Assets = Accounts Receivables + Inventories + Net Fixed Assets + Cash at Bank
- Total Assets = $500,000 + $1,500,000 + $1,000,000 + $50,000
- Total Assets = $3,050,000
Total Liabilities is calculated using the formula given below
Total Liabilities = Trade Payables + Short-Term Debt + Term Debt
- Total Liabilities = $300,000 + $1,000,000 + $1,100,000
- Total Liabilities = $2,400,000
Net Worth is calculated using the formula given below
Net Worth = Total Assets – Total Liabilities
- Net Worth = $3,050,000 – $2,400,000
- Net Worth = $650,000
Therefore, the net worth of GHJ Ltd. as on the balance sheet stood at $650,000.
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Net Worth Formula– Example #2
Let us take the example of Apple Inc. to illustrate the computation of net worth. According to the annual report for the year 2018, the following information is available, Calculate the net worth of Apple Inc. for the year 2018 based on the information.
Solution:
Total Assets is calculated using the formula given below
Total Assets= Cash and Cash Equivalents + Marketable Securities + Accounts Receivable + Inventories + Vendor Non-Trade Receivables + Other Current Assets + Net PPE + Other Non-Current Assets
- Total Assets = $25.9 Bn + $211.2 Bn + $23.2 Bn + $4.0 Bn + $25.8 Bn + $12.1 Bn + $41.3 Bn + $22.3 Bn
- Total Assets = $365.8 Bn
Total Liabilities is calculated using the formula given below
Total Liabilities = Accounts Payable + Other Current Liabilities + Deferred Revenue + Commercial Paper + Term Debt + Other Non-Current Liabilities
- Total Liabilities = $55.9 Bn + $32.7 Bn + $10.3 Bn + $12.0 Bn + $102.5 Bn + $45.2 Bn
- Total Liabilities = $258.6 Bn
Net Worth is calculated using the formula given below
Net Worth = Total Assets – Total Liabilities
- Net Worth = $365.8 Bn – $258.6 Bn
- Net Worth = $107.2 Bn
Therefore, the net worth of Apple Inc. as on September 29, 2018, stood at $107.2 Bn.
Source Link: Apple Inc. Balance Sheet
Explanation
The formula for net worth can be derived by using the following steps:
Step 1: Firstly, determine the total assets of the subject company from its balance sheet. Total assets comprise all that can generate future cash inflow, which includes fixed assets, trade receivables, prepaid expenses, etc.
Step 2: Next, determine the total liabilities which also available in the balance sheet. Total liabilities include all types of future payment obligations like term debt, short-term borrowing, trade payables, etc.
Step 3: Finally, the formula for net worth can be derived by subtracting the total liabilities (step 2) from the total assets (step 1) of the company as shown below.
Net Worth = Total Assets – Total Liabilities
Relevance and Use of Net Worth Formula
It is very important to understand the concept of net worth because it helps in assessing the financial health of a company. It basically shows what the company will own in case all the liabilities are to be paid off by liquidating the available assets. Positive and increasing net worth is indicative of good financial health, while a negative or depleting net worth may be a cause for serious concern. As such, lenders scrutinize the net worth of the business before extending any loan to them.
Net Worth Formula Calculator
You can use the following Net Worth Formula Calculator
| Total Assets | |
| Total Liabilities | |
| Net Worth | |
| Net Worth = | Total Assets – Total Liabilities |
| = | 0 – 0 |
| = | 0 |
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