(net assets – 5 minute read)
Hi there accounting fans!
We’re back with more hard hitting accounting facts!
Net assets, also known as net worth or equity, represent the difference between a company’s assets and liabilities. In other words, it’s the value of everything a company owns, minus everything it owes.
How to calculate net assets
To calculate net worth/assets, you first need to list out all of a company’s assets, including cash, investments, property, equipment, and inventory. Then, subtract all of the company’s liabilities, such as loans, mortgages, and outstanding bills. The resulting number is the company’s net assets.
For example, let’s say a company has $100,000 in cash, $50,000 in investments, and $200,000 in property and equipment. It also has $75,000 in loans and $25,000 in outstanding bills. The company’s net worth/assets would be $250,000 ($100,000 + $50,000 + $200,000 – $75,000 – $25,000).
Why are they important?
Net assets are important because they give an indication of a company’s financial health and stability. A company with high net worth is generally considered to be in a stronger financial position than one with low net worth.
Net assets/worth can also be used to determine a company’s shareholder equity, which is the portion of the company that belongs to its shareholders. To calculate shareholder equity, you subtract the company’s outstanding shares of stock from its net assets.
Can they be used to value a business?
Yes, they can value a business. Often businesses with negative net worth (more liabilities than assets) are not good buys. If you are looking to buy a business via share acquisition note that you could also be taking over the liabilities of said business.
If you are looking to put your business on the market, make sure that your net worth position is in the positive before advertising its sale.
That’s net assets in a nutshell! The next time you encounter this concept you’ll know what it’s all about! Need an accountant to check out your business net assets? Hit us up at SH Advisory!
Stay positive!