Defining Net Worth

by Investing School on November 20, 2009

If you keep up on finance, this is a term that is tossed around a lot. Most people want to know what their net worth is and use it as a barometer for their financial success so far in life.

Financially speaking, net worth is a company’s total assets after subtracting all outside liabilities. Within a company, it is called ‘shareholder’s preference’. It also may be called ‘book value’.

When talking about personal finance, a person’s net worth is determined in the same way as a business’ is. After reviewing all of a person’s assets (long term assets) and subtract the value of all liabilities then you are able to discover an individual’s net worth.

Specifically in business, the same formula is applied, however, the value of the assets and liabilities are at the carrying value. Carrying value means that it is the value that is expressed on financial statements.

One thing that net worth is NOT is the determination of market value for a certain company. Market value is not the same as net worth.

A company’s or a person’s net worth is also a determining factor in credit worthiness. If an investor sees that a company’s investment history is sound they are more likely to be interested in investing in said company, as it poses less of a risk.

There are other terms in which net worth is known by. It can be referred to as owner’s equity, shareholder’s equity or net assets. Net worth is valuable in determining where a person or company stands financially.

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