What Are Net Equity, Net Assets and Deficit Equity?
Net equity, net assets and deficit equity are accounting terms that may appear on a company's balance sheet. While net equity and net assets describe a company or fund's financial worth, deficit equity is a term used to describe a situation where a company's liabilities are greater than its assets.
Net equity, net assets and deficit equity are all terms that may arise on a company's balance sheet. This is a document that is prepared periodically and is used for accounting purposes. It is also prepared for the benefit of stockholders or any entity that has a financial interest in the company, such as a creditor. Net equity, net assets and deficit equity are all derived using Generally Accepted Accounting Principles (GAAP) that must be adhered to if the balance sheet is to have any credibility.
Net equity is used in valuing a business. This measurement is a result of valuing a business using the multiple of discretionary earnings method, which is used primarily for private businesses that are not floated on an exchange. The business's discretionary cash flow, or its pre-tax and pre-expense earnings, is multiplied by a factor that takes into account the company's performance parameters. The company's liabilities, or what the company owes, are subtracted to obtain net equity.
Net assets, or net asset value (NAV), is a company's total assets minus its total liabilities. Total assets are what a company owns. As a result, net assets are often equated to a company's total shareholder's liability. The calculation of net assets varies by company. Where an independent retail store may calculate net assets on a quarterly or biannual basis, an investment instrument such as a mutual fund will calculate net assets every day. For the latter, the share price is based on the NAV.
Deficit equity, also known as negative equity, is not a measurement of a company's value. It describes a situation where the company's value is exceeded by its liabilities. This may occur when a company has issued stock whose value is less than that of the company. Other situations include the issuing of bonds that have a value greater than the total value of the company.