Net assets are what a company owns outright, minus what it owes. Net assets provide a rough guide for the value of company resources. Typically, the higher a company's net asset value, the higher the value of a company.
What Are Net Assets?
Net assets equals the company assets minus liabilities. Assets are valuables that a company owns whereas liabilities are what a company owes to someone else. The concept is the same as net worth for individuals.
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Net assets are virtually the same as shareholders' equity because it’s the company’s monetary worth.
Net Assets Formula
You can find the figures for the net asset formula on the company balance sheet. The formula for net assets is:
How to Calculate Net Assets
Let's assume that Company Z's balance sheet reported $10,500,000 in assets and $5,000,000 in total liabilities. The company's net assets would be:
$10,500,000 - $5,000,000 = $5,500,000 (Net Assets)
It is important to note that most assets and liabilities on the balance sheet are listed at their book value rather than at their fair market value. Net assets are not equal to the cash a company would have remaining if it sold everything.
Using Net Assets with Different Calculations
To understand the variations with assets, there are several calculations. Each one tells you something different about a company’s financial health. Below are some common ways to look at net assets within a company.
Net Operating Assets
A net operating asset (NOA) is a specific number that reflects operational value. It tells you what operating assets are currently making the company money. Operating assets include elements like patents, inventory, equipment, and buildings.
To calculate NOA, you’ll need to reorder the balance sheet. This calculation separates operations from financing activities like investments:
What Are Net Fixed Assets?
Calculating net fixed assets shows asset depreciation (reduction of value over time). Fixed assets are purchased for the long run and are part of tangible assets. These can include buildings and equipment that will eventually need to be replaced or repaired.
Net fixed assets reveal the remaining life of an asset (i.e. residual value). Net fixed assets equal gross fixed assets minus accumulated depreciation.
Net fixed assets are useful for a company to keep track of what may need to be replaced in the future. If this number is low – but the total fixed asset number is high – it shows that fixed assets will need attention.
How Financial Analysts Calculate Net Fixed Assets
Financial analysts calculate net fixed assets with a more complex formula that includes any improvements made, as well as liabilities.
What Are Net Tangible Assets?
All companies have both tangible and intangible assets. Tangible assets are physical and can be sold (made liquid) for a predicted price. Tangible assets include things like fixed assets as well as inventory. Intangible assets include things like patents and brand ownership.
Since tangible assets make up the majority of most companies’ balance sheets, it's a good metric to understand.
Net tangible assets provide a number that is focused only on the physical assets of a company. In some industries (like manufacturing), this will be especially important. In others (like the medical or scientific fields), net tangible assets may be much lower than intangible assets.
This is a major reason why the entire balance sheet needs to be considered when analyzing a company.
What Are Unrestricted Net Assets?
Unrestricted net assets is a term that relates directly to non-profit organizations. Non-profit companies accept donations that need to be accounted for. Unrestricted net assets are donations made to a non-profit, and the company can do what it needs to with this money (as long as it is legitimate).
While unrestricted assets are still in conversational use, the technical term has been replaced as of 2018. It’s now known as ‘net assets without donor restrictions.’
Non-profit organizations in the US report net assets without donor restrictions on a Statement of Financial Position. This is akin to a balance sheet at for-profit companies.
Why Net Assets are Important
Assets should provide a company with consistent returns. Net assets illustrate the assets a company actually owns, as well as the debt a company has.
Companies with negative net assets are usually in financial trouble. One solution is to sell off assets to generate cash and pay off debts. Companies may also try to renegotiate their debt to lower payments or principals due.
Firms can file for Chapter 11 bankruptcy, allowing them to restructure their debts. If none of these tactics are successful, a firm with negative net assets will eventually end up in Chapter 7 bankruptcy.
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