Net worth is the value the assets a person or corporation owns, minus the liabilities they owe. It is an important metric to gauge a company's or an individual's financial health and it provides a snapshot of the current financial position
Net worth is calculated by subtracting all liabilities from assets. An asset is anything owned and has monetary value, while liabilities are obligations that deplete resources. Positive net worth means that assets exceed liabilities, while negative net worth results when liabilities exceed assets. Positive and increasing net worth indicates good financial health while decreasing net worth is a cause for concern as it might signal a decrease in assets relative to liabilities.
Net Worth in Business
In business, net worth is also known as capitalization or shareholders' equity. The balance sheet is also known as a net worth statement. The value of a company's equity equals the difference between the value of total assets and total liabilities. Note that the values on a company's balance sheet highlight historical costs or book values, not current market values.
Lenders scrutinize a business' net worth to determine if it is financially healthy. If total liabilities exceed total assets, a creditor may not be too confident in a company's ability to repay its loans.
A consistently profitable company will have a rising net worth or book value as long as these earnings are not fully distributed to shareholders as dividends. For a public company, a rising book value will often be accompanied by an increase in the value of the company's stock price.
Net Worth in Personal Finance
An individual's net worth is simply the value that is left after subtracting liabilities from assets. Examples of liabilities (debt) include mortgages, credit card balances, car loans and education loans. An individual's assets include savings account balances, the value of securities (e.g., stocks, ETF, Fixed Deposits, Bonds), real property value, the value of automobile, etc. In other words, current market value of your assets after paying off personal debt is your net worth.
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