Net tangible assets and stockholders' equity are two distinct accounting and finance concepts that provide insight into a company's value as an investment. Stockholders' equity is listed on the balance sheet and is available to the public for publicly traded corporations. Investors must perform their own calculations based on balance sheet data to get net tangible assets. Understanding the difference between these two concepts, and the uses of each, can lead to more informed investment decisions and a deeper understanding of different companies' valuations.
Net Tangible Assets
The word tangible refers to things that one can see or touch. Examples of tangible assets include buildings, vehicles and machinery. The net assets figure includes intangible items such as goodwill, patents and trademarks, which, while still adding value to a company, do not exist in the physical world. Net tangible assets takes intangibles out of the equation to reveal the value of physical assets that a company owns. Net tangible assets can provide clearer insight into a company's liquidation value and can help investors to see beyond shady accounting practices such as altering the goodwill figure to meet financial goals.
Subtracting intangible assets from total assets leaves investors with a gross tangible assets figure. To arrive at net tangible assets, investors subtract the value of outstanding liabilities from the value of tangible assets. This reveals the value of fully owned assets compared to assets pegged to outstanding debt, since liabilities are virtually always paired with assets. Taking on debt to purchase inventory, for example, would increase liabilities and assets; taking the value of the liability out of the equation removes the “borrowed” inventory from the valuation.
Stockholders' equity represents the company value that can be assigned to each outstanding share of stock. The value of stock outstanding listed in the stockholders' equity section of a balance sheet includes par value and any money received in excess of par. The stockholders' equity section also lists retained earnings and the value of dividends paid during an accounting period. Stockholders' equity includes a number of temporary accounts, such as revenue, that are emptied out and transferred to various asset accounts before balance sheets are prepared.
Net tangible assets can provide insight for deciding whether to liquidate a company or continue to operate it in the future. If a company's intangible assets are significantly more valuable than tangible assets, then a company may be worth more as a going concern than it would be in liquidation, assuming intangible assets have been calculated and reported legally and ethically. If net tangible assets are large compared to gross tangible assets, it can be a sign that a company is good at managing its debt, and the opposite holds true as well. Analyzing stockholders' equity can reveal whether a publicly traded corporation is a good candidate for a short-term trade, a long-term trade or a dividend play. Companies with high dividend payouts can be profitable to buy and hold over the long term, regardless of stock-price fluctuations. Companies with high retained earnings may be safer stock plays, while companies with lower retained earnings likely take more risks to expand and increase stock prices, making them better potential short-term plays.
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