This is Steven Sorensen, your net worth blogger from Iowa! Today I would like to kick things off by discussing an important formula which we will go back to from time to time in this blog: how to estimate the net worth of a company.
You don’t need to be an accountant to understand this simple formula I’m about to discuss. If you can do basic addition and subtraction, then that’s good enough! The more technical aspects to it, you can leave to professionals, but for the purposes of this blog, you will really only need to familiarize with three basic concepts: assets, liabilities and net worth.
Net worth Formula
What are assets? Assets are essentially items that have a value such as cash, inventory, and accounts receivable. To find the assets of a company, you can look it up in their balance sheet. Tally all assets and remember this figure, this will be your total assets.
What are liabilities? Liabilities are essentially obligations and debts, items that take away value. Common examples of liabilities are accounts payable and salaries. As previously mentioned, to find the total liabilities of a company, just tally the liabilities found on the balance sheet.
Now what is net worth? Net worth is basically the value of a company once they close shop and settle their accounts after any other debts and liabilities are accounted for.
To arrive at a company’s net worth, it is total assets less total liabilities.
Intangible Assets and Intangible Liabilities
The above formula is the most basic one there is to find the net worth of a company. In accounting, there are other items that can go in the formula, two of which are intangible assets and intangible liabilities.
I have set aside these two items because, more often than not, you will need professional help to appraise these figures. As this blog entry is an introductory post for those who don’t have an idea about finance, I will give common examples of Intangible Assets and Intangible Liabilities. For the former, intellectual property and copyright is one. Brand is another. On the other hand, for intangible liabilities, these could be contingent liabilities, or liabilities that can be incurred in the future.
Why Is Net worth Important
There are many reasons why we look at a company’s net worth. For one, it gives investors an idea about a company’s financial standing. If you are an investor, you would certainly want to invest your money in a profitable company that will give you a good return on your investment.
If you are a business owner, you may look at a competing company’s net worth to see how they are doing. If they are doing poorly, you might consider buying them out and keep a good hold of your market share. If they are doing well, you might think of striking up a partnership, as merging two companies can create a stronger entity.
Overall, there are many uses to looking at a company’s net worth. For us here on this blog, we’re fascinated how Top Fortune 500 companies grew to be worth hundreds of billions!
Hear more from Steve Sorensen, about net worth, business, valuations, and more on this page.