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Home > Asset Management Checklists > Calculating a Company’s Net Worth

Asset Management Checklists

Calculating a Company’s Net Worth


Checklist Description

This checklist looks at how you measure the net worth of a company.

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Definition

The net worth of a company (sometimes referred to as its net assets) is measured by subtracting the total assets of the company from its total liabilities. Thus, net worth represents the liquidation proceeds a company would fetch if its operations were to cease immediately and the firm were sold off. For example, if a company has total assets of US$80 million and total liabilities of US$40 million, its net worth would amount to US$40 million. In this example, the company might own a factory worth US$40 million, machinery valued at US$20 million, and a fleet of vans valued at a further US$20 million. Its liabilities might consist of a loan of US$40 million used to fund the purchase of the machinery and vans. The net worth of a company is also known as the shareholders’ equity.

Net worth can be easily identified by referring to the company’s balance sheet, which will detail its total assets and liabilities, as well as its net worth. Of course, the balance sheet does not necessarily reflect the current market value of a firm but simply expresses the value at a particular point in time, i.e. when the balance sheet was drawn up. It is also important to remember that net worth does not take any account of how profitable the company is. It may be worth more or less if sold as a going concern.

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Advantages

  • It is easy to find out the net worth of a company—simply refer to its latest balance sheet.

  • Net worth provides a simple and straightforward way of measuring a company’s breakup value if it were to cease trading.

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Disadvantages

  • The balance sheet does not necessarily reflect the current market value of a firm but simply expresses the value at a particular point in time, i.e. when the balance sheet was drawn up.

  • It is also worth remembering that a company may have a different value if it is sold as a going concern. Net worth may underestimate or overestimate the true value of a company by a considerable extent. It does not take into account intangible assets such as goodwill, copyright, patents, and intellectual property. It also ignores how much revenue and profit (or loss) a company is generating.

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Action Checklist

  • Obtain the company’s net worth from its latest balance sheet.

  • Obtain as much other financial information as possible, including figures for revenue and profit (or loss).

  • Look at other indicators, such as the firm’s order book, and try to assess nonfinancial factors such as goodwill and the competitiveness of the company’s goods and services.

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Dos and Don’ts

Do

  • Obtain an estimate of the intangible assets of a company, such as intellectual property.

  • Look at other measures of corporate health, such as revenues, costs, and profits (or losses), as well as forward indicators such as order books.

  • Try to obtain estimates of the current value of the company’s assets and liabilities, rather than rely on figures from the balance sheets, which may be considerably out of date in volatile market conditions.

Don’t

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Further reading

Books:

  • Baker, H. Kent, and Gary E. Powell. Understanding Financial Management: A Practical Guide. Malden, MA: Blackwell Publishing, 2005.
  • Bandler, James. How to Use Financial Statements: A Guide to Understanding the Numbers. Burr Ridge, IL: Irwin, 1994.
  • Dickie, Robert B. Financial Statement Analysis and Business Valuation for the Practical Lawyer. 2nd ed. Chicago, IL: American Bar Association, 2006.

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