A company’s total assets less its total liabilities is that business’s net worth. Knowing the net worth of a business can offer investors a more thorough picture of the company’s financial strength, including the amount of money the business would have after all debts are paid off and all assets are liquidated. Net worth is also known as shareholder’s equity or stockholder’s equity.
In order to determine the net worth of a company, you must first identify the company’s total assets by checking the company’s most recent balance sheet. Assets are measurable resources that are intended to provide economic value to the company in the future. Assets that can be redeemed within one year include accounts receivable, investments, supplies, inventory, prepaid expenses, cash equivalents and cash. Also, businesses generally hold fixed and long-term assets such as land, buildings and equipment as well as intangible items such as licenses, trademarks and patents.
After you have identified a company’s assets, make sure that each asset is correctly valued. Keep in mind that some accounting principles require a company to use different methods to value different assets, but in general, most assets on the company’s balance sheet are valued at the exact price for which they were purchased. However, there are some exceptions: Land is not depreciated, assets like equipment and property are valued at their initial cost minus accumulated depreciation and inventory may be valued lower than the fair market value.
Once you have identified the company’s assets and determined the value of each asset, subtract total liabilities to determine the company’s net worth. Liabilities are also found on the balance sheet, and they are obligations that a business owes to other parties such as the government, clients, employees, creditors and vendors. Just as with assets, liabilities can be either long- or short-term. Long-term liabilities include are bonds payable, long-term notes payable and retirement benefits for employees that are usually due in more than a year. Wages payable to employees, unearned revenue, interest expense, sales tax payable and accounts payable are categorized as short-term liabilities.
The higher the net worth of a company, the more resources the business has to pay for unexpected expenses or invest in new growth. However, net worth calculations do have a limited function. Since most assets are valued at cost, net worth may not accurately represent the assets’ fair market value, and net worth does not take into consideration the company’s future potential earning power. As a result of these limitations, investors also take into account business valuations and financial ratios when evaluating the net worth of a company.
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Author: Jay White
I started Dumb Little Man so great authors, writers and bloggers could share their life "hacks" and tips for success with everyone. I hope you find something you like!