Investors and managers must look to key financial indicators to assess the performance of a company and determine if the company is on the correct financial path. One of these indicators is the net worth of the company. Net worth is shown on the bottom of the balance sheet, or on the right side, depending on how the financial statements are organized.
The formula used to calculate the net worth of a company is the same as the formula that is used to calculate the net worth of an individual. The assets of the company, or items that it owns or holds the title to, minus its liabilities, equal the owner's equity. Owner's equity and net worth are two terms often used interchangeably.
Definition of Net Worth
Net worth is a reflection of what the owners or investors in a company would have left over if all of the assets were sold and the proceeds were used to pay off all of the creditors. It also is the net amount of money that the owners have invested in the company.
Factors Affecting Net Worth
To increase net worth, you must either increase the assets of the company or decrease the liabilities. Entering a program to accelerate the payoff of business loans or other debt reduction will increase the net worth, as can holding more assets in the company's name. Increased profits without a corresponding increase in expenses will increase the net worth through greater amounts of retained earnings. Retained earnings are added to the net worth or equity accounts as part of the accounting period close-out process.
Net worth expressed as a measure of dollars may have limited meaning unless it is compared with the other financial markers of the business. Net worth is often compared to company debt as a percentage, which is also called the debt-to-equity ratio. This ratio is sometimes tracked over time to monitor increases and decreases as another indicator. If the debt-to-equity ratio is decreasing, more of the company's operations are being financed with investment. An increasing ratio indicates the company's operations being financed by more by debt.