Whether you like it or not, your business will be judged by investors, creditors and even your customers by its financial health. Nobody wants to climb aboard a sinking ship. And no matter how good you are at what you do, the numbers in your ledger may paint a very different picture of your business than you strive for in your branding.
While there are many indicators of financial health, many analysts and investors will judge your company’s performance by its net assets in proportion to your liabilities (debt). If you want to ensure that your business looks as good on paper as you strive to make it look in practice, you need to address this figure. Here we’ll look at everything you need to know about net assets and how to calculate them.
What are net assets?
Net assets are an important part of your business balance sheet. It is the sum total of everything your company owns (gross assets) minus the total cost of your debts (liabilities). The resulting figure is often referred to as your company’s net asset value. The calculation is the same as for an individual’s net worth.
If you are a sole trader, your net assets are the same as your equity as the business owner. For corporations, your net asset value is reported as stockholder equity. For non-profit organisations, net assets need to be split into two categories – with and without donor restrictions. This allows regulators to make sure that NPOs are operating under their established guidelines.
How to calculate your net assets
In theory, the formula for calculating your company’s net assets is fairly straightforward. It’s simply a matter of deducting your liabilities from your overall assets. However, inaccuracies can paint an unrealistic portrait of your company’s finances. So it’s important to take the time to do it right.
Let’s break it down into simple steps:
First, calculate your gross assets, which is everything on the right side of your balance sheet. Take the time to go over these individually, as unreported or misreported assets can give your company an unflattering net asset value.
Next, take stock of all your total liabilities. Don’t make the mistake of only including your current liabilities. Your total liabilities must include all provisions, borrowing, current and other non-current liabilities.
When you are sure that you have accounted for all assets and liabilities, deduct your liabilities from your assets to get your net asset value.
Examples of net assets
The retail giant Amazon is a good illustrative example of how net assets can increase after a period of sustained investment in infrastructure. At the start of the 2010s Amazon’s net asset value was lower than one might expect for such a ubiquitous brand with a net worth of around $6bn by 2010. Throughout the decade, the retailer has been building an infrastructure for profitability, which is why we have seen both net worth and profits spike from 2016 onwards.
However, another ubiquitous US retailer Sears has seen net asset values trend in the opposite direction, with high overhead costs and the increasing threat of online competition causing net asset values to plummet in the mid-2010s.
Why is it important to know the value of your net assets?
Your net assets are a reliable indicator of your company’s health and thus how it appears to outside investors and internal stakeholders. Companies with negative net assets may be seen as riskier. As such, they may struggle to gain the favour of investors or be able to access credit at reasonable rates.
This can have a lasting impact on profitability, which in turn can cause their net asset value to fall even further.
We can help
If you’re interested in finding out more about net assets, debt to asset ratios, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.