Tangible Net Worth
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.
Explaining '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.Calculation
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.
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.
Tangible Net Worth FAQ
How do you calculate tangible net worth?
Tangible net worth is the total of one's tangible assets (those that can be physically held or converted to cash) minus one's total debts. The formula is: Total Assets - Total Liabilities - Intangible Assets = Tangible Net Worth.
How does SBA define tangible net worth?
Although not defined in the Small Business Act, SBA generally defines “tangible net worth” as net worth minus goodwill. In SBA's general definition, only goodwill, not intangible assets, is subtracted from the net worth of the business.
How do you calculate tangible assets on a balance sheet?
The information required for calculating the tangible asset value is stated on a company's balance sheet. Subtract the amounts listed for intangible assets from the total assets. Next, subtract total liabilities to find the tangible asset value.
Is tangible net worth the same as equity?
Shareholder equity and net tangible assets both convey a company's value. The big difference is that shareholder equity includes intangible assets, such as goodwill, while net tangible assets does not. Net tangible assets is the theoretical value of a company's physical assets.
What is the debt to tangible net worth ratio?
Debt to Tangible Net Worth Ratio = Total Debt / Total Tangible Net Worth. Because this ratio subtracts the intangible assets from the company's total assets, it's often known as the debt to tangible net worth ratio. These figures are reported on a firm's balance sheet.
Does tangible net worth include subordinated debt?
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 be excluded when calculating tangible net worth.
Further Reading
GAAP goodwill and debt contracting efficiency: evidence from net-worth covenants
link.springer.com [PDF]
… Prior research looks for accounting and economic effects given pre-existing covenants … the agency costs of debt and thus can be related to the preference for tangible net-worth covenants … more opportunities to increase the variance of their assets and thus transfer wealth from debt …
link.springer.com [PDF]
… Prior research looks for accounting and economic effects given pre-existing covenants … the agency costs of debt and thus can be related to the preference for tangible net-worth covenants … more opportunities to increase the variance of their assets and thus transfer wealth from debt …
www.jstor.org [PDF]
… Prior research looks for accounting and economic effects given pre-existing covenants … the agency costs of debt and thus can be related to the preference for tangible net-worth covenants … more opportunities to increase the variance of their assets and thus transfer wealth from debt …
www.journals.uchicago.edu [PDF]
… Prior research looks for accounting and economic effects given pre-existing covenants … the agency costs of debt and thus can be related to the preference for tangible net-worth covenants … more opportunities to increase the variance of their assets and thus transfer wealth from debt …
www.nber.org [PDF]
… Prior research looks for accounting and economic effects given pre-existing covenants … the agency costs of debt and thus can be related to the preference for tangible net-worth covenants … more opportunities to increase the variance of their assets and thus transfer wealth from debt …
search.proquest.com [PDF]
… Prior research looks for accounting and economic effects given pre-existing covenants … the agency costs of debt and thus can be related to the preference for tangible net-worth covenants … more opportunities to increase the variance of their assets and thus transfer wealth from debt …
papers.ssrn.com [PDF]
… Prior research looks for accounting and economic effects given pre-existing covenants … the agency costs of debt and thus can be related to the preference for tangible net-worth covenants … more opportunities to increase the variance of their assets and thus transfer wealth from debt …
www.computer.org [PDF]
… Prior research looks for accounting and economic effects given pre-existing covenants … the agency costs of debt and thus can be related to the preference for tangible net-worth covenants … more opportunities to increase the variance of their assets and thus transfer wealth from debt …
academic.oup.com [PDF]
… Prior research looks for accounting and economic effects given pre-existing covenants … the agency costs of debt and thus can be related to the preference for tangible net-worth covenants … more opportunities to increase the variance of their assets and thus transfer wealth from debt …
www.journals.uchicago.edu [PDF]
… Prior research looks for accounting and economic effects given pre-existing covenants … the agency costs of debt and thus can be related to the preference for tangible net-worth covenants … more opportunities to increase the variance of their assets and thus transfer wealth from debt …
www.sciencedirect.com [PDF]
… Prior research looks for accounting and economic effects given pre-existing covenants … the agency costs of debt and thus can be related to the preference for tangible net-worth covenants … more opportunities to increase the variance of their assets and thus transfer wealth from debt …
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FAQ
How do you calculate tangible net worth?
Tangible net worth is the total of one's tangible assets (those that can be physically held or converted to cash) minus one's total debts. The formula is: Total Assets - Total Liabilities - Intangible Assets = Tangible Net Worth.
How does SBA define tangible net worth?
Although not defined in the Small Business Act, SBA generally defines “tangible net worth” as net worth minus goodwill. In SBA's general definition, only goodwill, not intangible assets, is subtracted from the net worth of the business.
How do you calculate tangible assets on a balance sheet?
The information required for calculating the tangible asset value is stated on a company's balance sheet. Subtract the amounts listed for intangible assets from the total assets. Next, subtract total liabilities to find the tangible asset value.
Is tangible net worth the same as equity?
Shareholder equity and net tangible assets both convey a company's value. The big difference is that shareholder equity includes intangible assets, such as goodwill, while net tangible assets does not. Net tangible assets is the theoretical value of a company's physical assets.
What is the debt to tangible net worth ratio?
Debt to Tangible Net Worth Ratio = Total Debt / Total Tangible Net Worth. Because this ratio subtracts the intangible assets from the company's total assets, it's often known as the debt to tangible net worth ratio. These figures are reported on a firm's balance sheet.
Does tangible net worth include subordinated debt?
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 be excluded when calculating tangible net worth.
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