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 Does the Debt Service Coverage Ratio Mean?

cash flowThe debt service coverage ration which is also commonly referred to as the ‘Debt Coverage Ratio’ is the measure of the cash available to pay the pay the current debt for principal, interest as well as lease payments. Is the Ration of the available cash flow statement to debt servicing and in general states the total operating income in terms of the multiple debts which is due within the duration of 1 complete year. This includes not only the interest and principal but also the lease payments and the sinking funds. The debt service coverage ratio is often used as a benchmark while measuring any individual or any corporations to produce cash which would be enough to cover the debt obligations including the lease payments. Most used in commercial banking, the debt service coverage ratio is that minimum ratio that is accepted by the lender which may be a certain type of loan situation.

The importance of DSCR in different sectors

No while in corporate finance the DSCR refers to the measurement of cash flow with respect to the debt obligation when it comes to government finance the DSCR is defined as that particular amount which belongs to the export earning that is required to cover up for the annual interests and principal payments which are on behalf of the country’s external debts. And in terms of personal finance the DSCR is nothing but the ratio which is required by the loan officers in the bank to evaluate the overall income property loans.  Also it is always considered a better idea to have a higher value of the DSCR as it becomes easier to obtain the loan if the ratio is higher.

The basic formula for the Debt-Service Coverage Ratio

DSCR = Net Operating Income/ Total Debt Service

Here,

Net operating income= net income+ interest expense+ depreciation + other non cash items

Debt service= principal repayment+ interest payments+ lease payments

So what do the DSCR represent?

Now during the process of giving the loan, the lenders usually assess their borrower’ DSCR on a routinely basis before making a loan.

  • If the value of the DSCR is anything but less than 1 then it refers to negative cash flow. This states the inability of the borrower pay the current debt obligations or cover them up without taking the help form any external source which means borrowing more! For example if the DSCR of the borrower is suppose .86, this means that he/she will be able to cover up for only 86% of the annual debt payments. Thus in most cases lenders avoid giving loans to such entities but if they have some strong external support to cover up for the debt then they may get the loan.

 

  • If the value of DSCR is approximately 1, in this case some lenders may agree giving loans to the borrowers as this value shows only a slight decline in being able to cover the debt obligations.

 

  • If the value of the DSCR is greater than 1, in this case the entity that is going to borrow the money has considerable income to pay for its current debts and the lender easily agree to give loans to them.

Conclusion

Thus in this the debt service coverage ratio plays a major role in terms of borrowing or issuing of a loan. It determines the abilities of the entity of how able it is to cover up for their debt obligations and thus is of great help to the lenders in many ways.