A company's net worth equals its total assets minus its total liabilities. Knowing a company's net worth can give investors a better understanding of its financial strength, including how much money a company would have after liquidating all assets and paying off all debts. Net worth is also known as stockholder's equity or shareholder's equity.
Determine Total Assets
The first step in determining the net worth of a company is identifying its total assets. You can do this by referring to the company's most recent balance sheet, where assets are listed first. Assets are measurable resources that will provide future economic value to the company. Current assets such as cash, cash equivalents, prepaid expenses, inventory, supplies, investments and accounts receivable are assets that can be redeemed within a year. In addition, businesses typically hold long-term and fixed assets like equipment, buildings and land. Assets can also be intangible items like patents, trademarks and licenses.
Consider Asset Valuation
After identifying assets, ensure that the assets are valued using an appropriate valuation method. Generally accepted accounting principles require a business to value different assets using different methods. In general, most assets on the balance sheet are valued at the price the business paid. However, there are exceptions and nuances. For example, inventory may be valued at the lower of cost or the fair market value of the assets. Assets like property and equipment are valued at cost less accumulated depreciation, while land is not depreciated.
Determine Total Liabilities
After identifying and determining total assets, subtract total liabilities to find the business' net worth. Liabilities, also included on the balance sheet, are obligations that a business owes to outside parties like vendors, creditors, employees, clients or the government. Just as with assets, liabilities can be either short-term or long-term. Short-term, or current, liabilities are amounts that must be paid within a year or less. Accounts payable, sales tax payable, interest expense, unearned revenue and wages payable to employees are typically short-term liabilities. Retirement benefits for employees, long-term notes payable and bonds payable are usually due in more than a year and are categorized as long-term liabilities.
Limitations of Net Worth
Net worth helps an interested party understand how financially sound a business is. Higher net worth means a business has more resources to invest in new growth opportunities or to pay for unexpected expenses. However, there are limitations to the usefulness of net worth calculations. Because most assets are valued at cost, net worth may not provide an accurate representation of the fair market value of the assets. Net worth also doesn't consider the future potential earning power of the business. Because of these limitations, investors often also consider financial ratios and business valuations when evaluating a company.
- michaeljung/iStock/Getty Images