How is the Net Worth of a Company Calculated?

time and money saving tipsWhat is net worth?

Net worth is basically the performance indicator which is obtained by combining both the net asset and the earnings after deducting the liabilities as well the expenses form it.  Net worth is generally considered to be the starting point when it comes to determining the value of any company.

What is the net worth of any company?

Now since net worth determines the performance of a company, it is basically the total worth of the company when all the debts of that business are settled. Net worth represent various aspects of any company like its financial health, secure fundings and many other things.  Thus net worth of a company represents the book value or the equity of the shareholders of that particular firm.  So once all the debts are payed off the values of the asset left with the company is basically its net worth.

How to calculate the net worth of a company?

The formula used for calculating the net worth of a company is an s follow-

Net worth of a company formula= Total asset – total liabilities

Where,

  1. Assets- These are the items of value of any particular company whose net worth is to be calculated. These items can be the property of the business and is used in paying the expenses, salaries or the settling of debts.
  2. Liabilities- These are basically those debts that a business owes to a particular company, employees, vendors or any agencies belonging to the government. The company is responsible for paying these liabilities through the business operations.

The net worth of any company is also known as the Book Value or the Shareholder’s Equity.

What do we determine by calculating the net worth of a company?

Now as we calculate the net worth by using the formula mentioned above we may come up with two different results.

  1. Positive value- If the net worth is a positive number, this means that the company has a greater value of asset as that of liabilities. This shows that the business is doing pretty good.
  2. Negative value- If the net worth value comes in negative numbers, this means that the liabilities are greater than its assets which are not a good sign. Thus showing that the business is not doing well.

This formula helps in determining about all the assets that will be left over with the company once the debts are settled. Thus the reaming assets can be divided among the shareholders if the company is to be liquidated and finally being sold off.  So it always considered better to use this method when it comes to comparing different companies while also not overlooking the other business prospects of that company.

Conclusion

Thus net worth of any company is quite essential when it comes to determining its actual value.  So if the market value of any particular company is trading at a premium which is fair or is at a discount occasionally then it becomes very easy to determine the great value opportunities that the company holds within itself. This can also help you in avoiding stocks which may be selling at a value which is more than its actual worth.

What is a Perfect Competition Market?

Market analysisA Pure or Perfect Competition Market is a theoretical model of a market scenario comprising a large number of buyers and sellers who buy and sell homogenous (same quality) products at the same prevailing price in market. Thus, ideally in this situation there is no rivalry among competitors regarding prices, resources or consumers. They all sell a single product at a single price. This type of market acts as a benchmark to compare other existing markets to. While one extreme is a perfect competition market, the other extreme is a monopoly market condition where in a product is produced by one firm only and the firm can charge whatever price it deems worthy of their product. No one can question the price and no one can offer an alternative.

Features of Perfect Competition Market

  • Large number of buyers and sellers so that no individual can affect the price of the commodity
  • The product by all sellers is same in quality
  • The seller can enter or exit the market at any time free of cost
  • Transportation cost is absent as it will lead to difference in prices of a commodity
  • Advertising cost is zero
  • Consumers have 100% knowledge of product and market conditions and changes in these conditions
  • Production factors like labour, machinery, capital etc. have complete mobility in market without any hindrances
  • Each firm earns normal profits and no firm earns abnormal profits i.e. all sellers are at the same level
  • No firm can influence the price of the commodity. They simply accept the prevailing market price
  • There are no government interventions or any artificial restrictions.

Perfect competition sounds quite good in theory but it is almost impossible to achieve. No firm that has to accept the prevailing price at a loss will enter the competition.

Disadvantages of Perfect Competition Market

  • There is an absence of innovation as every seller sells the same product without any distinguishing feature
  • Due to perfect information flow, there are no or minimal marginal profits to firms as anyone can replicate the procedure
  • There will not be distinction of economies based on scale, as the firms will not have enough profits to further invest in expansion processes and thus all be on the same level

Perfect competition does not exist in the real world mainly because the product itself is different, be it on the basis of production, quality, marketing techniques or selling. Products even differ according to target audiences. As the product changes, the rest of the market is bound to change and thus removing the possibility of a perfect competition market. Though some features of perfect competition might seem to be developing now in the market, a completely perfect market cannot be obtained.