What Are Net Tangible Assets?
The term net tangible assets refers to the total physical assets of a company minus all intangible assets and liabilities. In other words, net tangible assets focus on physical assets such as property, plant, and equipment (PP&E), as well as inventories and cash instruments. Physical assets are anything that is listed on a company's balance sheet while intangible assets are those without a physical form. A company's net tangible assets can help it secure financing and determine how much risk it carries.
- Net tangible assets are all the physical assets a company owns less any intangible assets and liabilities.
- They are listed on a company's balance sheet and indicate its book value.
- To calculate a company's net tangible assets, subtract its liabilities, par value of preferred shares, and any intangible assets, such as goodwill, patents, and trademarks from its total assets.
- Net tangible assets allow analysts to focus on a firm's physical assets in isolation.
- Companies can access financing and determine how much risk they carry based on the value of their net tangible assets.
Net Tangible Assets
Understanding Net Tangible Assets
As noted above, net tangible assets are any physical assets less intangible assets and liabilities. In order to calculate this, a company takes the fair market value (FMV) of its tangible assets and subtracts the fair market value of its liabilities. Remember that physical assets refer to anything that can be touched and can be found listed on a company's balance sheet, such as:
Intangible assets, on the other hand, are those that have no tangible form, such as trademarks, goodwill, patents, and copyrights. Liabilities, of course, refer to any debts the company owes, whether that's current or non-current, including 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 $200,000 (the sum of both liabilities and goodwill) from the value of the company's total assets of $1 million.
The value of a company's net tangible assets may also be referred to as its net asset value (NAV) or book value. This value is important to a company as it provides a window into how much risk it carries—notably, its liquidity and solvency. It can also be used to help it access financing to meet its future goals.
Advantages and Disadvantages 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. This means it's important to look at a company's price-to-book (P/B) value and compare it against similar companies to gauge performance.
Companies can assess asset position without including intangible assets
Usefulness can vary across industries, especially those with higher intangible asset values
Net Tangible Assets vs. Net Tangible Assets Per Share
Some companies use their net tangible assets per share value in lieu of the net tangible assets measurement. To calculate a company's net tangible asset per share of common stock, divide its net tangible assets figure by the number of outstanding common shares. If a company has net tangible assets of $1 million and 500,000 shares outstanding, its net tangible asset value per share is $2.
This value is useful when conducting a 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.
Real-World Examples of Net Tangible Assets
- Amazon: The ecommerce giant reported total assets of $321.2 billion, total liabilities of $227.8 billion, and goodwill of $15.01 billion on Dec. 31, 2020. Its resulting net tangible assets were $78.39 billion, or $321.2 billion less $227.8 billion and $15.01 billion.
- Meta: The company behind the Facebook platform had total assets of $133.4 billion, total liabilities of $32.3 billion, intangible assets of $894 million, and goodwill of $18.7 billion on Dec. 31, 2019. To calculate the value of Meta's net tangible assets at that time, subtract its intangible assets, goodwill, and total liabilities from its total assets. So, its net tangible assets were approximately $81.5 billion.