Net Worth

What do you understand by the ‘net worth’ of a company?

How is it different from the owners’ equity? What items comprise the net worth? Is dividend policy connected with the net worth in any way? Explain.

'Net Worth'

The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities. In the business context, net worth is also known as book value or shareholders' equity.

For a company, total assets minus total liabilities. Net worth is an important determinant of the value of a company, considering it is composed primarily of all the money that has been invested since its inception, as well as the retained earnings for the duration of its operation. Net worth can be used to determine creditworthiness because it gives a snapshot of the company'sinvestment history. also called owner's equity, shareholders' equity, or net assets

The net worth of a company (sometimes referred to as its net assets) is measured by subtracting the total assets of the company from its total liabilities. Thus, net worth represents the liquidation proceeds a company would fetch if its operations were to cease immediately and the firm were sold off. For example, if a company has total assets of US$80 million and total liabilities of US$40 million, its net worth would amount to US$40 million. In this example, the company might own a factory worth US$40 million, machinery valued at US$20 million, and a fleet of vans valued at a further US$20 million. Its liabilities might consist of a loan of US$40 million used to fund the purchase of the machinery and vans. The net worth of a company is also known as the shareholders’ equity.

Net worth can be easily identified by referring to the...