What is Tangible Net Worth?
Masterworks What is Tangible Net Worth?
Tangible net worth (TNW) is a measure of a company’s financial strength and stability that takes into account only its tangible assets and real estate.
It’s calculated by subtracting a company’s total liabilities from the value of its physical assets, such as cash, real estate and equipment.
Intangible assets, such as copyrights, trademarks, stockholder sentiment and intellectual property, are not included in the tangible net worth calculation.
Tangible net worth is used as a measure of a company’s financial strength because it reflects the value of the company’s assets that can be easily converted into cash or used as collateral for loans.
It’s also a useful measure for investors who are interested in the company’s financial stability and ability to pay its debts. A company with a high tangible net worth is generally considered to be in a stronger financial position than a company with a low tangible net worth.
TNW is a type of valuation very similar to book value, which simply subtracts liabilities from assets. Book value typically includes intangible assets as well.
Formula and Calculation of Tangible Net Worth
Tangible Net Worth = Total Assets – Liabilities – Intangible Assets
The total liabilities, total assets and intangible assets are located on the company’s balance sheet according to US GAAP (generally accepted accounting principles).
Company liabilities include loans, bonds, shareholder equity and retained earnings.
Individuals can also calculate their tangible net worth using the same formula of total tangible assets minus total debt obligations.
How to Calculate Your Tangible Net Worth
While the calculation of physical assets – liabilities is simple, the step-by-step act of completing it can take some time. Some individuals may prefer to work with a CPA to best calculate net worth.
- Gather all financial statements including investment accounts, bank accounts and credit card statements.
- Determine the value of your assets. It is easiest to begin with the most liquid assets, which are going to be cash and cash equivalents.
- Figure out the current market value of all investments including retirement plans, stocks, bonds and mutual funds.
- Determine values for real and physical property such as collectibles, real estate, vehicles and rental properties. Now you have your total assets.
- To calculate your total liabilities, start with secured debt such as car loans or mortgages. The move on to unsecured debt such as student loans or credit card debt.
What Can Tangible Net Worth Tell You?
Tangible net worth essentially tells you the company’s total net worth of physical assets. Physical assets include:
- Cash
- Accounts receivables: Money owed to a company from its customers for sales
- Inventory of finished goods
- Equipment
- Buildings
- Real estate
- Investments
The purpose of the tangible net worth calculation is to find a company’s physical valuation, net of its outstanding liabilities and intangible assets.
It can be used to approximate the liquidation value of a company in the event of bankruptcy or sale.
Tangible net worth is also a factor often used by a lender if a company is seeking outside financing. It is important for individuals who apply for personal or small business loans who require a “real” net worth figure.
Lenders may be interested in your net worth of just tangible assets because it is a more accurate view of financial assets the lender could recoup if it had to liquidate assets if you default on the loan.
Limitations of Tangible Net Worth
Tangible net worth is useful because of the simplicity in its calculation. All figures are found on the company’s financial statements, and you don’t need to determine an accurate valuation of intangible assets.
However, it doesn’t show the actual net worth of a company. There are several key limitations of TNW as a measure.
First, for companies with significant intangible assets such as a major software firm, their intellectual property can be worth billions of dollars.
Second, there are different types of debt, which can behave differently during a liquidation. For example, subordinated debt is debt that is only repaid after all other debt obligations have been satisfied. Calculating subordinated debt the same as other debt obligations can complicate the TNW calculation.
Additionally, tangible net worth doesn’t consider future growth prospects or current profitability with figures such as cash flow.
Additional Corporate Finance Valuation Models
While tangible net worth is a useful tool to determine the market value of physical assets, there are additional valuation models used to provide a fuller picture.
Discounted Cash Flow
Discounted cash flow (DCF) corporate valuation is a method of estimating the intrinsic value of a company by forecasting its future cash flows and discounting them back to present value. The intrinsic value of a company is the value of the company based on its expected future cash flows, rather than its current market price.
It is important to note, however, that the accuracy of a DCF valuation depends on the assumptions made about the company’s future cash flows and the accuracy of the discount rate used.
Market Capitalization
Market capitalization, also known as market cap, is a measure of a company’s size and value that is calculated by multiplying the company’s stock price by the number of its outstanding shares. Market capitalization is commonly used as a measure of a company’s size in the stock market and is often used as a way to value a company in corporate valuation.
Market capitalization is a useful measure of a company’s size and value because it reflects the market’s perception of the company’s growth potential and financial strength. However, it is important to note that market capitalization does not take into account the company’s fundamental financial performance, such as its revenue, profits, or cash flow, and it can be affected by market conditions and investor sentiment. As such, market capitalization should be considered in conjunction with other financial metrics when evaluating a company’s value.
Enterprise Value
Enterprise value, also known as firm value, is a measure of a company’s total value that takes into account both its equity and its debt. It’s calculated by adding the company’s market capitalization, preferred stock, and debt to its minority interest and then subtracting its cash and cash equivalents.
There are several factors that can impact a company’s enterprise value, including its growth potential, profitability, financial stability, and the risk associated with its operations.
It’s important to note that enterprise value is not a measure of a company’s market value and does not take into account the value of its tangible assets, such as real estate or equipment.
Overall, enterprise value is a useful measure of a company’s overall value that takes into account both its equity and its debt. It is commonly used in corporate valuation to compare the value of different companies and to assess the attractiveness of potential investment opportunities.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a financial measure that is used to assess a company’s financial performance. It is calculated by taking a company’s net income and adding back interest, taxes, depreciation and amortization expenses.
EBITDA is commonly used as a measure of a company’s profitability because it excludes non-cash expenses and certain financing costs that can impact a company’s net income. It is also used to compare the financial performance of companies in different industries, as it allows for the comparison of companies with different capital structures, tax rates, and depreciation policies.
However, it is important to note that EBITDA is not a measure of a company’s cash flow and does not take into account the company’s working capital needs or debt payments. It also does not reflect the value of a company’s assets or its financial stability.
As such, EBITDA should be considered in conjunction with other financial metrics when evaluating a company’s financial performance.
The Bottom Line
Tangible net worth is a measure of a company’s financial strength and stability that takes into account only its physical assets and real estate.
TNW is calculated by subtracting a company’s total liabilities from the value of its physical assets, such as cash, real estate and equipment.
Tangible net worth is used to assess a company’s ability to meet short-term financial obligations and to fulfill any covenants it has with its creditors.
It’s a particularly important metric for companies in the financial services industry, as these companies are often required to maintain a minimum level of tangible net worth in order to comply with regulatory requirements.
