What is tangible net worth?
Tangible net worth can be defined as the total net worth of a company, excluding any value
derived from intangible assets like copyrights, patents, and intellectual property. It can
be easily obtained by subtracting the company's total liabilities from the tangible
assets.
The tangible net worth comes into play when money lenders and investors want to look upon
the company's credibility. A balance sheet portrays both liabilities and assets of a company.
Among them, the value earned from tangible assets. The tangible assets of a company include
the following:
Cash
Account receivable
Inventories
Company equipment
Buildings
Factories
Properties
Investments Frequently Asked Questions (FAQs)
What is the difference between tangible and intangible assets?
Tangible assets:
The assets that could be physically touched and seen.
Tangible assets are depreciated.
It can be easily liquidated.
Cost can be easily determined.
Intangible assets:
Intangible assets cannot be physically touched or seen; however, their impact could only
be felt.
These assets are amortised.
Intangible assets cannot be liquidated easily.
Difficult to determine cost.
How to calculate tangible net worth of a company?
The following formula is used to obtain the tangible net worth of a company:
Tangible net worth = Total assets - total liabilities - intangible assets
What does the tangible net worth indicate in a company?
The purpose of tangible net worth is to obtain the valuation of physical assets owned by
a company without including the value of its liabilities as per the recordings in the balance sheet. It
can also be said that tangible net worth represents the company's liquid assets that can be utilised
during the state of bankruptcy.
The tangible net worth is one of the easiest methods to obtain the net value of physical
assets that are owned by a company than evaluating the valuation of intangible assets such as
customer goodwill or intellectual properties.
What are the pros and cons of tangible net worth?
Tangible net worth comes with a bunch of pros and cons. So let us first discuss the pros
of tangible net worth.
Tangible net worth is one of the things that act as a valuation method for companies. Therefore,
one can easily analyse the net worth of a company when it earns a constant profit.
It is easier to calculate tangible net worth.
A company can also determine its strategic initiatives by frequently analysing the tangible
net worth. Apart from that, tangible net worth also helps a company understand the amount
of liquid cash needed to execute such initiatives.
The following are the cons of tangible net worth:
Tangible net worth is not a specific term.
Tangible net worth only comes to play when the company has no other entity in operations
or is non-subsidiary, etc.
Tangible net worth does not work as a valuation calculation method when a company suffers
from loss over a prolonged period (more than three years).
What could be an ideal example of tangible net worth?
Let us understand the concept of tangible net worth with the help of an example. If
a company XYZ is willing to take financial support from a moneylender for carrying out
its business operations. The tangible net worth signifies the total valuation of a company's
liquid assets and is, therefore, acts as collateral when the company applies for a loan. For example,
suppose the XYZ company owns AU$12 million tangible net worth. The moneylender here would
look upon the value of total tangible net worth to determine the company's credibility
and predict its capability to repay the debt.