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How to Determine the Net Worth of a Company
Investing in business opportunities is an attractive idea for many, but it is wise to conduct some background research as to evaluate the level of risk for the particular investment. Net worth helps in determining the creditworthiness of a business entity, giving a snapshot of its investment history. It is a key determinant of the company’s value in case it has been built on funding invested since its establishment, together with the retained earnings for the period of its operation. For companies, the net worth is referred to as shareholder's equity, owner’s equity, and net assets. The market value of the business entity may be bigger or smaller than its net worth if it is sold as a going concern.
The first thing to do is to have a look at the financial information or balance sheets of the business that caught your eye. To this purpose, you need to calculate the net worth by simply looking at its updated or current balance sheet.
Find the balance sheet by searching over the internet or more specifically, at Yahoo! Finance. On entering this site, type in the stock code of the company in ‘Get Quotes’ and mark the ‘Balance Sheet’ option (to the left). Look at the total assets of the business, which are found in assets and liabilities. You need the total assets rather than the current assets. Note that the net worth of a company is based on the value of the total assets and liabilities at carrying value. The net worth is regarded inaccurate to the degree that items in the financial statements do not reflect their market value. Use an online financial calculator to check the numbers on the balance sheet.
Proceed by identifying the total liabilities of the company. Similar to the total assets, you need to identify the total rather than current liabilities. You have to take into account the current operating costs and long-term financial obligations of the company. The liabilities will be listed on the balance sheet by subject, giving you a good idea of the amount of debt the company has. You may use a financial calculator to check if the numbers are correct.
When calculating the long term assets, keep in mind that there is a difference between tangible net worth and total net worth of a company. The results from the 2 calculations can differ substantially.
To determine the net worth of a company, you have to find the difference between its total assets and liabilities. For example, the Yahoo! Finance profile of Coca Cola reveals that its total assets for 2009 amount to $48,671,000 while the company’s total liabilities are $23,872,000. By subtracting the second number from the first, you get a net worth of $2,479,900. This figure presents a positive net worth, showing that the company’s assets are more than its financial obligations.
When establishing the net worth of a business, you might look at its history and potential for future growth. It is worth investigating whether the company offers unique products that are competitive on the market.
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