What is Net Worth
It is a financial accounting terminology that refers to the total value of an organization. Net worth is usually the total assets minus the total liability. Any business for that matter has to pen down its assets, liabilities and shares on the balance sheet for any given accounting period. It is the calculation of all the assets that is left after the firm liability is paid off. But here we should not get confused with net worth being the same as market value. Since the value that is presented in the balance sheet is not the market value.
When the financial institutions and banks what to lend money to the companies they often take a look at the net worth. This is because it is this net worth that gives them an indication of the kind of value the company has retained from its investments. There are two kinds of net worth that we usually come across:
Tangible Net Worth: when we subtract the liabilities from the total assets we arrive at the net worth and this amount reflects in the balance sheet. The kind of balance sheet that provides these assets and liabilities may be categorized as long term and short term. Such kind of net worth is referred to as tangible net worth.
Intangible Net Worth: intangible assets are those that cannot be seen example goodwill of the company, patents etc. The valuation of these intangible assets is done by an expert. This value of intangible assets is added to the already calculated tangible assets, this value is known as intangible net worth.
The uses of net worth are many since it represents the company’s overall financial position. Especially the stake holders and investors will look forward to the net worth of any company to weigh their business and the worth of investment. Not only this the company itself can look back to the previous balance sheets to take a call on the business. The net worth also makes one understand if the investment made will increase the firm’s value or not. One more advantage is that it also considers the time value of money. Which means if the money invested for a certain period of time is rewarding more or not.
Even in person life we all make a budget when we are investing in buying a house or car. We all check it the investment done today will yield what we are looking forward to. Since money invested today on any kind of asset will definitely yield more worth after a few years. Hence this same applies to big organizations were they have to invest millions of dollars in setting it up. Net worth is the only tool that allows even a layman to understand that the company is doing good from the business point of view.