What is tangible net worth?
Most often, the value of a firm is determined using its tangible net worth, which does not include any value generated from intangible assets like patents, intellectual property, and copyrights.
A person’s home equity, other real estate holdings, bank and investment accounts, and significant personal possessions like jewelry or a car are all included in their tangible net worth assessment. Generally, minimal personal assets should be considered when calculating an individual’s value.
Method and Estimate of Tangible Net Worth
TNW=Total Assets−Liabilities−Intangible Assets
where:TNW=Tangible Net Worth
This is how tangible net value is determined:
- Find the balance sheet listings for the company’s total assets, liabilities, and intangible assets.
- Subtract all liabilities from the total assets.
- After deducting intangible assets, take the result.
Individuals may also determine their net worth by subtracting their debt obligations from their tangible assets.
What Your Tangible Net Worth May Indicate
The entire value of a company’s physical assets is its tangible net worth. These resources may consist of:
- Cash accounts receivable, or sums of money that clients owe a business for purchases
- Stock, including completed items
- apparatus, including computers and machinery
- Structures
- Investments in Real Estate
Based on numbers from the balance sheet, the tangible net worth calculation is intended to demonstrate the overall value of a business’s tangible assets net of its outstanding obligations. It provides a rough estimate of the company’s liquidation value in the case of bankruptcy or sale.
The main benefit of the tangible net worth calculation is that it is easier to do than the total net worth calculation since physical assets are more accessible to accurately estimate than intangible assets like customer goodwill or intellectual property. Patents and private designs are examples of intellectual property.
When a business or person approaches a lender for funding, the lender often considers their tangible net worth. Typically, banks and creditors use a company’s physical assets to obtain a borrowing facility. The bank can lawfully confiscate the assets if the business defaults or misses payments. To avoid lending more money than the company’s assets are worth, creditors may better assess the amount and conditions of the borrowing facility using the tangible net value calculation.
The Drawbacks of Calculating Tangible Net Worth
One disadvantage of utilizing tangible net worth is that when a business or a person has significant intangible assets, it may come up very short of representing actual net worth. For instance, a significant computer software company like Microsoft Corporation (NASDAQ: MSFT) may have intellectual property rights and other intangible assets valued at billions of dollars; they would not be included in the computation of tangible net worth.
Subordinated debt, which is only repaid in the case of a default or liquidation after all debt obligations to senior debt holders have been met, is one aspect that might make the computation of tangible net value more difficult. A straightforward example of subordinated debt is a secondary mortgage with real estate as security.
Will the first mortgage’s debt repayment only begin after the secondary mortgage has paid it off? When figuring out a person or business’s tangible net worth, subordinated debt should not be considered if the property value on which the subordinated debt is held is insufficient to repay the debt, along with the debt owed to senior and primary debt holders.
Conclusion
- A company’s tangible net worth is usually its net value, less intangible assets like patents, intellectual property, and copyrights.
- A company’s assets are less its total liabilities than its intangible assets, which is its net value.
- Individuals may also determine their net worth by subtracting their debt obligations from their tangible assets.
