How to calculate net worth
Net worth is the total value of assets a legal or natural person owns. Net worth is the total value of a company or individual’s assets after deducting all liabilities. This parameter is critical in the financial analysis of a company because it allows you to assess the real picture of things.
The net worth is one of the main criteria for working in hedge funds and investment companies. It helps to choose the right strategy and to determine the feasibility of investing in certain assets. In addition, net worth is considered a characteristic of a certain person, for example, a businessman or a celebrity.
Features of the assessment of the indicator
The net worth is the result of deducting all liabilities from assets. Assets are all financial instruments with monetary value owned by someone. Conversely, liabilities are everything that reduces and depletes resources, such as loans and debts.
There are two types of equity:
– positive, where the amount of assets exceeds the amount of liabilities;
– negative, where liabilities are more significant than the valuation of assets.
Reducing liabilities can turn negative equity into positive equity. Increasing assets is also feasible, provided that liabilities remain at the same level.
The role of the indicator in different areas
Net equity of an enterprise is called book value or equity capital. The indicator is the difference between the value of assets and total liabilities. Moreover, the calculation does not take into account the current market value but the historical value.
In the financial evaluation of a company, net equity is one of the most important tools for creditors. If liabilities exceed assets, doubts arise about the company’s ability to repay loans.
An increase in book value is characteristic of a consistently profitable business. However, this will continue until profits are paid out to shareholders in the form of dividends. For a public company, an increase in equity will go hand in hand with an increase in share price.
The net worth is the amount after deducting loans, bills and taxes. It takes into account all types of assets, including:
deposit accounts;
– securities;
– real estate;
– cars.
People with large amounts of capital are interested in the wealth management industry. Accredited investors have assets of $1 million or more. The Securities and Exchange Commission (SEC), which deals with securities and stock exchanges, grants them this status. This authorisation opens up opportunities to operate in the financial market.
As for negative net worth, it is less critical for young people. However, over time, increasing debt means that a person becomes unreliable in terms of solvency. This can be limiting when applying for a loan or completing paperwork.
