In this article, we cover how to calculate Net Worth of a company. Net worth is the difference between the assets a business has acquired/owned and the liabilities that it owes. If assets are higher than liabilities then it is net worth positive. On the other hand, if liabilities exceed assets then, it is negative net worth.
Mathematically,
Net Worth = Assets – Liabilities
How to calculate the Net Worth of a company?
But, wait there is more to it. It is necessary to analyze the business from a common stockholder’s perspective. In that case, we also need to subtract Preferred stock from the business’s net worth. In the event of a business getting liquidated, those who own preferred stocks get priority over common stockholders. So, they also get higher dividend yields among other benefits.
We need to take preferred stocks into consideration. Now, the net worth of a business would be:
Net Worth = Assets – Liabilities – Preferred Stocks
If we didn’t subtract preferred stocks from the net worth above. Then, there wouldn’t be any difference between Shareholders’ Equity as well as the net worth of a business. When we calculate the net worth of an individual, things are pretty straight. We subtract assets from liabilities and the difference is the net worth of an individual.
But, when it comes to calculating the net worth of a company. We need to understand that there could be multiple owners of a business. And, calculating it isn’t as straightforward.
In conclusion, to calculate the net worth of a company we need to subtract liabilities and preferred stocks from the assets.
