Updated July 10, 2023
Definition of Tangible Net Worth
Tangible net worth is the net worth of a company, based on the equation of total assets minus total liabilities, along with deductions related to intangible assets such as patents, intellectual property, copyrights, etc., owned by the business.
Tangible assets are physical assets that can be valued or measured based on physical attributes. Assets such as property, plant and equipment, machinery, cash, land, etc., can be evaluated and recorded in the financial statements. In purchasing and maintaining such tangible assets, the company/business incurs costs and expenses listed as liabilities. The company’s net worth based on the tangible asset base is known as tangible net worth. Net worth, as well as tangible net worth, is a concept that is closely associated with total equity.
The following formula can calculate it:
All of these items on the left-hand side of the equation can be found on a company’s balance sheet. In addition, companies also value intangible assets, and their worth is mentioned on the balance sheet under the assets section (current/non-current).
An FMCG company is trying to evaluate its net worth growth based on the tangible assets it possesses. The graph below shows the growth in total assets, intangible assets, and liabilities. Comment on the tangible net worth of the company
Given table describes the three line items over ten years
|Date||Total Assets||Total Liabilities||Intangible Assets|
If we calculate the company’s tangible net worth based on the given data, we can produce a graph below.
As we can see from the graph, It has increased from $29,000 to $151,000 in the ten years. This means that the growth in the company’s total tangible assets has outpaced the growth in the total liabilities.
- Calculate the net worth and the tangible net worth of ABC Ltd. from the data given below:
The company’s net worth is total assets – total liabilities = $102,000 in FY19 and $50,000 in FY18. Net worth increased because the asset base increased without a proportional increase in the total liabilities.
The company’s tangible net worth is total assets – total liabilities – intangible assets = $80,000 in FY19 and $32,000 in FY18. It increased because of an increase in assets and a decrease in liabilities and only a small increment in intangible assets.
Credit Analysis and Tangible Net Worth
The tangible net worth calculation is an especially important concept from the perspective of credit analysis. A significant drawback with intangibles or intangible assets is their unquantifiable nature. That said, intangibles are also valued and measured, but the assessment varies widely from one analyst to another. Also, a company’s net worth, including intangibles’ valuation, can be vulnerable to economic shifts and external factors.
When we delve into the purpose of credit analysis, we come to know that the objective of performing credit analysis is to assess the capacity of a business to pay back loans/debts or interest on loans. Such an assessment requires accuracy and consensus on the company’s repayment abilities. Another important measure that credit analysis evaluates is liquidity and marketability. Any asset that is not marketable or liquid cannot be held as collateral while performing credit analysis.
Credit analysis uses the Tangible net worth formula described above to assess a business’s creditworthiness. It gives analysts a solid base from which credit analysis can be furthered on many other parameters.
- It can be used for financial management.
- It can be used for assessing the creditworthiness of a business
- Accounting and finance departments use the TNW concept for internal analysis and management reporting
- It can be a good evaluation method to assess the utilization of tangible assets in creating wealth for the business
- The tangible net worth of a company gives a good idea about its real worth. Sometimes, the valuations of intangible assets like goodwill and copyrights differ and are debatable. In such scenarios, net worth depends upon the tangible assets
- Calculation of it is easy
- It also gives a fair idea of how the company fares in terms of liquidity (assessing current assets) and solvency (assessing non-current assets)
- It is a good valuation method, but only if the company does not have an interest in other businesses
- Might miss the full picture of the valuation if the company has overseen acquisitions or divestitures recently
- May not assess how goodwill and patent work matter in the valuation of companies
Tangibles net worth valuations are good for companies to evaluate the business’s current and prospective financial health. This method gives a realistic view of how tangible assets shape the companies’ business. However, analysts must be mindful of making accurate assumptions and evaluations while assessing the tangible assets of their companies.
A company’s net worth can also be referred to as the total equity of the business. However, it takes us away from the total equity toward total equity minus the intangible assets. It increases as businesses generate more capital through equity. If the capital infusion is through liabilities, its growth will be relatively lower. This concept can be traced to the basic accounting equation.
If a company retains earnings after paying the debtholders and stockholders, the owner’s equity grows, thereby increasing the company’s net worth. This can be extended further if the company has a greater share of tangible assets than intangible ones.
This is a guide to Tangible Net Worth. Here we also discuss the definition and uses along with advantages and disadvantages. You may also have a look at the following articles to learn more –