What is 'Tangible Net Worth'
Tangible net worth is most commonly a calculation of the net worth of a company that excludes any value derived from intangible assets such as copyrights, patents and intellectual property. Tangible net worth is a simple calculation of a company's total tangible assets minus the company's total liabilities. It can also be calculated for individuals, using the same formula of total tangible assets minus total debt liabilities.
BREAKING DOWN 'Tangible Net Worth'The tangible net worth calculation is designed to represent the total value of a company's physical assets net of its outstanding liabilities, as based on figures shown in the company's balance sheet. In effect, it indicates an approximation of the liquidation value of the company in the event of bankruptcy or sale.
The calculation of tangible net worth for a company essentially includes all a company's physical assets. This includes cash and accounts receivables (AR), inventory, equipment, buildings and real estate, and investments. For an individual, the tangible net worth calculation includes such items as home equity, any other real estate holdings, bank and investment accounts, and major personal assets such as an automobile or jewelry. Relatively insignificant personal assets are not ordinarily included in the calculation for an individual.
Tangible net worth is a factor often considered by a lender from whom a company or individual is seeking financing.
One item that can complicate the tangible net worth calculation is subordinated debt, debt that in the event of a default or liquidation is only repaid after all debt obligations to senior debt holders have been satisfied. A simple example of subordinated debt is a secondary mortgage held on real estate. The secondary mortgage is only repaid after the debt represented by the primary mortgage is paid off. If the value of the property on which a company or individual holds subordinated debt is not sufficient to retire that debt in addition to debt owed to senior, primary debt holders, then the subordinated debt should not be included in the calculation of tangible net worth.
Positive and Negative Factors of Tangible Net Worth
The primary positive of the tangible net worth calculation is that it is simpler to do than a total net worth calculation, as it is easier to place an accurate value on physical assets than it is to evaluate intangible assets such as customer goodwill or intellectual property. Intellectual property includes things such as proprietary technology or designs.
The primary drawback of looking at tangible net worth is that it may fall substantially short as a representation of actual net worth in cases where a company or an individual has intangible assets of considerable value. For example, a major computer software firm such as Microsoft Corporation (NASDAQ: MSFT) may possess intellectual property rights that are worth billions of dollars.