Net Worth

Definition

The term net worth refers to a measure that allows the investor-analyst to understand how much money might be available to holders of common stock if a company were faced with liquidation. Net worth is of particular interest to lenders, which may require a company to maintain a threshold value for its net worth while a loan remains outstanding.

Calculation

Net Worth = Total Assets - Total Liabilities

Where:

  • The values for both total assets and total liabilities can be found on the company's balance sheet.
  • A more accurate assessment of net worth can be found by subtracting preferred stock dividends from total assets in addition to total liabilities.

Explanation

Return on investment measures allow the investor-analyst to understand the company's ability to provide investors with an acceptable return on their money. This is usually assessed by examining metrics such as net worth, returns on equity or assets, earnings, economic value added, and dividends. Return on investment metrics provide analysts with a way to determine a fair price to pay for a share of common stock. One of the ways to understand return on investment is by measuring a company's net worth.

An investor-analyst can better understand how much money is left over after all of the company's liabilities have been deducted from its assets is by calculating the company's net worth. In theory, this is the money that could be distributed to holders of common stock in the event of liquidation. Oftentimes lenders establish a minimum threshold for this value as long as the loan is outstanding. Net worth is sometimes synonymous with shareholders' equity.

Example

The manager of a large mutual fund would like to how much money might be available the holders of common stock in the event Company ABC goes bankrupt. He asked his team to review the balance sheet of Company ABC's most recent annual report. The team found the following: total assets of $125,000,000 and total liabilities of $87,500,000. The net worth of the company would then be:

= $125,000,000 - $87,500,000, or $37,500,000

Related Terms

issued shares to authorized shares ratio, preferred stock to stockholder's equity, retained earnings to stockholder's equity, funded capital ratio