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Tangible net worth

Tangible net worth is a term every business owner should know. Bankrate explains it.

What is tangible net worth?

When determining a consumer’s creditworthiness, lenders typically look at the person’s net worth. In the case of a business, a lender uses tangible net worth. Tangible net worth is determined by taking the total net worth of a company and deducting intangible assets from the total. Intangible assets include intellectual property rights such as patents, copyrights and company goodwill.

Deeper definition

A company balance sheet shows the company assets and liabilities. Tangible net worth is used to determine the true value of tangible assets. Tangible assets include items like buildings, vehicles, office equipment, and machinery. The value of tangible assets is used when a vendor is extending credit, if a company is being sold, or if a company is filing bankruptcy. Unless a company is publicly traded, stock is considered an intangible asset. The formula for determining tangible net worth is:

Tangible net worth = total assets – liabilities – intangible assets

When a business needs to calculate tangible net worth, the first step is reviewing its balance sheet. To arrive at a final figure, the company takes its total assets and identifies its intangible assets. From the total assets, they deduct the value of the following assets:

  • Stock
  • Patents and copyrights
  • Leases and franchises
  • Company goodwill
  • Life insurance policy value (less cash value)

A large company that has numerous patents and copyrights worth millions of dollars generally has less in liquid assets than a company that primarily deals in physical property.

Tangible net worth example

When lenders evaluate the creditworthiness of a company, they need to know what is available for collateral. Although a company may have intellectual property, those assets cannot be easily converted to cash and make them less valuable to the lender.

Intangible assets impact the capital of a company. Fixed capital comprises the assets a company owns that are not easily converted to cash, meaning those assets cannot be easily utilized to increase working capital despite their value to the company.

Company owners should always understand the tangible net worth of their assets. Tangible net worth will have an impact on a company’s ability to obtain credit, turn assets into cash for working capital, and the liquidation value of the company.

If you want to calculate the tangible net worth of your company, use this simple calculator.

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