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.