Tangible net worth
|Tangible net worth|
Tangible net worth is the net value of a company excluding all intangible assets (trademarks, patents, etc.). The simple formula is:
Tangible net worth = Total assets - Liabilities - Intangible assets
Investors might want to know the value of physical assets of the company, e.g. when the value of intangible assets seems overstated. Tangible net worth helps to determine that value. It can be similar to liquidation value, however, some of the intangible assets can keep their value even after the bankruptcy of the company.
Tangible net worth is easier to calculate than the total net worth. However, in the case of companies using cutting edge technologies and knowledge tangible net worth can be significantly lower than the real value of the company.
If the company has adequate access to collateralize a loan so the banks want to know about it. However, the bank will not accept the worth of assets on the balance sheet at face value. Usually, the banks request a monthly Tangible Net Worth Certificate and some banks demand them each time when a company uses its line of credit. The Tangible Net Worth Certificate is a testimony signed by:
- Chief Executive Officer (CEO),
- Chief Financial Officer (CFO),
- the controller
certifying to a company's liabilities and assets at the time when the Certificate is filed. To used the compute borrowing capacity is needed Certificate data.
Tangible Net Worth excludes:
- patents and copyrights,
- ineligible accounts receivable (generally those over 90 days old),
- loans to officers and employees,
- pre-paid investments and expenses in non-public, bankrupt or lightly traded companies because they are hard to convert to cash.
Moreover, a factor is commonly applied to the resulting Tangible Net Worth, which can obtain perhaps 70 % or 80 % to reach borrowing capacity. To get available borrowing capacity, outstanding bank loans are pulled out from borrowing capacity.
Limitations of Tangible Net Worth
The main disadvantage of looking at tangible net worth is that it can fall substantially short as an appearance of actual net worth in cases where an individual or a company has intangible assets of considerable value. One example can be a major computer software firm such as Microsoft Corporation which can possess a wealth of intellectual property rights and another elusive asset which are worth billions of dollars, but which should be excluded from the tangible net worth calculation.
- (R. Frankel, C. Seethamraju, T. Zach 2008)
- (D.E. Vance 2005)
- (R.C. Spurga 2004)
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- Frankel R., Seethamraju C., Zach T., (2008)., Gaap goodwill and debt contracting efficiency: evidence from net-worth covenants, Review of Accounting Studies, 13(1), 87-118.
- Niir T., (2014)., India Emerging Business Opportunities, Niir Project Consultancy Services
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Author: Klaudia Święs