What does the phrase “net worth” mean? Net worth is the value of everything you own (your assets) minus the value of everything you owe (your liabilities). If you own more than you owe, you have a positive net worth. If you owe more than you own, you have a negative net worth.
Individual or Household
Assets can include the cash in your pocket, the money in your bank account, the value of your retirement savings, and the market value of your home and automobile. Liabilities can include the value of the mortgage on your house, the value of any automotive loans your have, and money you owe on your credit cards.
Cash in your bank account: $5,000
Retirement savings: $30,000
Market value of house: $250,000
Market value of automobile: $10,000
Total assets: $295,000
Mortgage on house: $225,000
Loan on automobile: $8,000
Owed on credit cards: $16,000
Total liabilities: $249,000
Net Worth: $46,000 ($295,000 – $249,000)
It may be obvious to all that what everyone wants is to have a positive net worth. That means that after you pay everything you owe, you still have money or something of value left for yourself. Unfortunately, many find themselves in the opposite position of having a negative net worth, that is, owing more than they own.
In business, the principle is the same, except that the phrase “owner’s equity” or “shareholder’s equity” is sometimes used instead of the phrase “net worth”. Another phrase used when speaking about the net worth of a company is “book value”. The calculation, however, is the same: assets minus liabilities.
Assets can include money in a business’ bank account, the market value of its inventory, and the market value of any other property it owns, such as equipment or real estate. Liabilities can include such things as sales and payroll taxes it owes the federal or state government, and any short and long-term loans it owes creditors.
Cash in your bank account: $125,000
Market value of equipment: $210,000
Market value of inventory: $65,000
Market value of real estate: $300,000
Total assets: $700,000
Short-term loans: $125,000
Long-term loans: $475,000
Total liabilities: $650,000
Owner’s Equity (Net Worth): $50,000 ($700,000 – $650,000)
A person who wants to invest his or her money in a business, say, by buying some of its common stock, would wisely consider the book value (“net worth”) of the business. Some might think that buying the common stock of a business that has a negative book value (“net worth”) to be a very risky investment.