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What are 'Net Tangible Assets'

Net tangible assets is an accounting term calculated as the total assets of a company, minus any intangible assets such as goodwill, patents and trademarks, less all liabilities and the par value of preferred stock. In other words, its focus is on physical assets such as plant, property and equipment, as well as inventories and cash instruments. Net tangible assets is also known as "net asset value" or "book value." To calculate a company's net asset value on a per bond or per share of preferred stock or common stock, divide the net tangible assets figure by the number of bonds or shares of preferred stock or shares of common stock.

BREAKING DOWN 'Net Tangible Assets'

Net tangible assets are meant to represent a company's total amount of physical assets minus any liabilities within the company. The calculation of net tangible assets takes the fair market value of a company's tangible assets and subtracts the fair market value of its liabilities. Tangible assets can include items such as cash; inventory; accounts receivable; property, plant and equipment (PPE); and other assets. Liabilities include accounts payable, long-term debt and other similar obligations.

For example, if a company has total assets of $1 million, total liabilities of $100,000 and intangible goodwill of $100,000, its net tangible asset amount is $800,000. This is derived by subtracting $100,000 in both liabilities and goodwill from the total asset number of $1 million.

Importance of Net Tangible Assets

This measurement of a company's tangible assets is important because it allows a firm's management team to analyze its asset position without including obsolete or difficult to value intangible assets. A company's return on assets (ROA), for example, is often more accurate when net tangible assets are used in the calculation.

The usefulness of deriving net tangible assets, however, varies across industries. Medical device manufacturers, for example, have high levels of valuable intangible assets. It is therefore important to look at a company's price-to-book (P/B) value and compare it against similar companies to gauge performance.

Net Tangible Assets Per Share

Net tangible assets per share is sometimes used in lieu of the net tangible assets measurement. Net tangible assets per share is calculated by taking a company's net tangible asset number and dividing it by the total number of shares outstanding. If a company has net tangible assets of $1 million and 500,000 shares outstanding, its net tangible assets per share is $2.

Net tangible assets per share is useful when conducting comparative analysis of companies within an industry. Auto manufacturers, for example, may have high net tangible assets per share, while a software company with a high level of intangible assets may have a much lower number per share. It is therefore important to use this measure only when analyzing companies within the same industry.

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