The net worth of a business is also known as its book value or its owners' (stockholders') equity. This figure can be computed relatively easily using information found on a company's balance sheet. However, even if the balance sheet isn't available, you can still calculate a business' net worth if you have some basic financial information.
Starting with the basic accounting equation that describes the relationship between assets, liabilities, and owners' equity:
Assets = Liabilities + Owners' Equity
By determining a business's assets and liabilities, we can calculate its owners' equity, or net worth.
Assets
Assets
Everything a business owns is considered to be an asset. There are two main categories of assets to be aware of. Tangible assets include anything you can see, such as cash or real estate. Intangible assets include things that have value but aren't physical items and can be tougher to value. For example, if a business has a strong brand name, it can result in the ability to charge more than competitors for similar goods or services and therefore has some monetary value. Other types of intangible assets can include trademarks, patents, and industry knowledge, just to name a few.
There are many types of assets, which can include, but are not limited to:
- Cash and short-term investments.
- Receivables.
- Inventory.
- Buildings and land.
- Equipment.
- Intangible assets -- such as a business's brand name, patents, or goodwill.
- Long-term investments.
Liabilities
Liabilities
The opposite of assets, liabilities represent the obligations of a business. Common forms of liabilities include:
- Accounts payable -- goods or services purchased on credit from a supplier.
- Wages payable.
- Accrued expenses.
- Debt (short- and long-term).
- Interest payable.
- Deferred income taxes.
Example
An example
Let's say that you own a business and that the assets listed on your balance sheet are as follows:
| TYPE OF ASSET | VALUE |
|---|---|
| Cash and short-term investments | $120,000 |
| Receivables | $25,000 |
| Inventory | $50,000 |
| Buildings/land value | $350,000 |
| Equipment | $50,000 |
| Intangibles | $40,000 |
| Long-term investments | $150,000 |
| Total assets | $785,000 |
And you currently have the following liabilities:
| TYPE OF LIABILITY | AMOUNT |
|---|---|
| Accounts payable | $20,000 |
| Accrued expenses | $35,000 |
| Long-term debt | $250,000 |
| Deferred income taxes | $15,000 |
| Total liabilities | $320,000 |
So, in this example, to determine the net worth of your business, you can simply subtract your business' liabilities from its assets.
Net Worth = $785,000 - $320,000 = $465,000
Now, it isn't uncommon for businesses to have a low or even negative net worth, especially if the business is relatively young. In many cases, a negative net worth can be a sign of trouble, but this isn't necessarily the case.
Related investing topics
If you came here looking for information on stocks, we have you covered. Head over to our Broker Center, where we can help you get started on your investing journey.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest better! Email us at [email protected]. Thanks -- and Fool on!
The Motley Fool has a disclosure policy.
