When we want to know how much Net worth refers to the total value of an individual or a company. It can apply to a person, an organisation, a sector or even a state or country. In the world of business, net worth also refers to the company’s book value or shareholder’s equity. This is what the investors will look at when they are deciding whether they should invest in a company. Hence, it is crucial for business owners to know where this figure comes from and what does it mean to the business.
Before they can calculate their company’s net worth, they need to generate financial statements based on the accounting records first. This is because, in the process of calculating, they need to take some numbers from those statements. Business owners who face difficulties in this step should seek help from an accounting services in Johor Bahru and get assistance from the professionals. After they obtain those financial statements from the accountants, they can use those figures to calculate various ratios to measure the performance and profitability of the business.
If you own a business and you wish to calculate its net worth, the first thing you need to know is the sum of your assets and liabilities. When you are calculating the total assets that your company owns, you should sum up the value of all tangible assets and intangible assets. You can find these figures in your company’s balance sheet (Also see How Do Balance Sheet & Trial Balance Differ from Each Other?), but if you want to get a more accurate sum, you can consider valuing your assets. The other component is the liabilities. When calculating them, you need to add up the value of your current liabilities and non-current liabilities. These numbers will appear in the company’s balance sheet too.
After getting the sum of assets and sum of liabilities, respectively, you can calculate the net worth of your company by subtracting the total liabilities from total assets. The net worth can be positive or negative. This depends on whether the sum of your assets is greater than the sum of liabilities or the other way round.
By looking at the net worth of a business, we will be able to know the current financial stability of a business. In general, having a positive net worth means that the finances of the company are stable and healthy as the sum of assets it possesses has exceeded its liabilities. If a company has a negative net worth, it indicates that the liabilities of the business are greater than its assets (Also see Revaluation of Fixed Assets). This can be a cause of concern among the investors and the company’s management. Apart from that, decreasing net worth can be a warning sign, too, as this reflects that the company’s profitability has been declining.
As net worth serves as an excellent indicator of whether the financials of business is healthy and stable, different stakeholders will use net worth to analyse the financial condition of the company. From the management’s perspective, net worth helps to identify whether the company is operating properly to meet the goals. Also, they will be able to know whether they need to make any changes in the business operations for improvement. For potential investors, net worth is one of the aspects that they will look at to decide whether the company is worth investing their money. On the other hand, creditors may study the company’s net worth so that they get to know whether any issues may potentially affect the company’s ability to pay the money it owes to them.