Tangible Net Worth
How is it calculated?
Tangible Equity = Total Equity - Net Book Value of Intangible Assets
Goal of the Ratio
This calculation is meant to determine what a businesses balance sheet looks like when it is limited to only tangible assets. Think of this as the old school conservative way to feel more comfortable with a balance sheet full of things you can touch (equipment & inventory) and not of things that you cannot (Blue Sky or Finance Charges).
When is it used?
When a borrower has a large amount of intangible assets on their balance sheet. These intangible assets may have occurred from when the previously purchased another business or incurred some large financing costs for an expansion. Both of these situations would create an intangible asset on the balance sheet. This calculation shows the remaining net worth when these intangible assets are removed.
Rules of Thumb
Higher Better - Please note all ratios should be viewed in relation to industry norms to determine overall adequacy.
What changes in the ratio could mean:
Some example reasons why Tangible Net Worth can change:
- Profitability
- Contributions/Distributions
- Large expansions that are heavily debt financed
Other Relevant Terms
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