Most people might have heard of the term “net worth of a company” quite often. To put it simply, it refers to the company’s net earnings and assets after the deduction of all expenses and liabilities. You can calculate a company’s net worth by using two different methods. The first method is by taking the total values of the company’s asset, less its sum of liabilities. Another way to calculate the net worth is to sum up the company’s share capital, as well as its reserves and surplus.
Hence, we get to know that a company’s net worth is actually the same as its book value or equity (Also see Can You Distinguish Equity and Shares?). It is the remaining value of the company’s asset after it settles all the liabilities. Hence, if you want to calculate the it for your company, make sure that you have the correctly generated financial statements with you as you will need to extract some information from them. For business owners who are too busy to get the accounting tasks done by themselves, they can consider employing an accounting firm in Malaysia as this helps to ensure that their accounting (Also see An Overview of Accounting Assumptions) records are always up to date without costing them much.
Like what we discussed just now, one of the ways of calculating the net worth is to deduct the total liabilities of the company from its total assets. In the real situation, it is normal to see the sum of assets and liabilities to keep changing. By analyzing the increases and decreases in the assets and liabilities, we will be able to know whether the net worth of a company has been growing or reducing.
An upward trend of a company’s net worth indicates that its earnings and assets increase more than its expenses and liabilities, or the earnings and assets decrease less than its expenses (Also see How to Track the Expenses and the Benefits It Brings to Your Business) and liabilities. On the contrary, a drop in the net worth of the company means that the decrease in the earnings and assets is greater than the decrease in the expenses and liabilities, or the growth in the earnings and assets is less significant compared to the increase in the expenses and liabilities.
Note that the term “net worth” does not carry the same meaning as “market value”. The former refers to the value of the assets that a company owns, less the liabilities it owes. As against, the latter illustrates the price at which people would trade an asset in a competitive market. It is the estimated sum of money that people should exchange the property on the date the valuation was carried out, and both the buyer and the seller should make the deal willingly.
In some cases, the company’s net worth may show a negative value. This means that the amount of liabilities is greater than that of the assets. Business owners should find out the reasons that cause this to happen and take prompt action to remedy it. To increase its net worth, business owners should pay off the company’s liability and reduce its expenditures. They need to take this issue seriously as it may lead to insolvency if left untreated.