What Is Tangible Net Worth?
For an individual, the tangible net worth calculation includes 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.
Formula and Calculation of Tangible Net Worth
TNW=Total Assets−Liabilities−Intangible Assetswhere:TNW=Tangible Net Worth
Tangible net worth is calculated as follows:
- Locate the company's total assets, total liabilities, and intangible assets, which are all listed on the balance sheet.
- Take total assets and subtract total liabilities.
- Take the result and subtract intangible assets.
Tangible net worth can also be calculated for individuals, using the same formula of total tangible assets minus total debt liabilities.
- Tangible net worth is typically the net worth of a company excluding intangible assets such as copyrights, patents, and intellectual property.
- The tangible net worth calculation for a company is total assets minus total liabilities minus intangible assets.
- Tangible net worth can also be calculated for individuals, using the same formula of total tangible assets minus total debt liabilities.
What Tangible Net Worth Can Tell You
Tangible net worth for a company is essentially the total value of a company's physical assets. These assets can include:
- Accounts receivables or money owed to a company from its customers for sales
- Inventory, such as finished goods
- Equipment, such as machinery and computers
- Real estate
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 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.
Tangible net worth is a factor often considered by a lender from whom a company or individual is seeking financing. Typically, banks and creditors will use physical assets of a company to secure a borrowing facility. If the company fails to make payments or defaults, the bank can legally seize the assets. The tangible net worth calculation helps creditors determine the size and terms of the borrowing facility so that they don't lend more than the company's assets are worth.
Tangible Net Worth
Limitations of Using Tangible Net Worth
A drawback of using 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 a wealth of intellectual property rights and other intangible assets that are worth billions of dollars, which would be excluded from the tangible net worth calculation.
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 the debt owed to senior and primary debt holders, then the subordinated debt should not be included in the calculation of tangible net worth.