While one reads all about different statistical parameters, the net worth and valuation of a company have common ground in terms of number crunching.
However, there is a lot more than meets the eye, especially when it comes to the difference between Net Worth and Valuation.
In order to understand these two parameters, let us first understand the meaning of both these words and then take a detailed look at how they differ from each other.
Valuation
A valuation is a number that reflects the true worth of a company and/or its assets. Valuation is performed by asset managers, investment bankers, private equity firms, and venture capitalists to determine whether a company is worth investing in.
Valuation is the process of estimating the fair market value of a company. This value is based on several factors, including but not limited to:
How much cash the company has on hand
The current and projected profitability of the company
The amount of debt owed by the company
The total number of outstanding shares of the company’s stock
The more profitable a company is and the greater its potential for growth, the higher its value will be.
Net Worth
Net worth is a financial statement that describes a company’s overall financial health. It includes the total of all assets and liabilities. The net worth of a business can be negative if its liabilities are greater than its assets.
Difference between Net Worth and Valuation
Net worth is the balance sheet value of a company, and valuation is its market value. In other words, net worth is the book value of a company, and valuation is its market value.
Meanwhile, say ACME Corp has total company assets of $200 million and total company liabilities of $50 million. Its net worth would be $150 million ($200 million – $50 million).
Now say ACME Corp wanted to sell its business for the best price possible. A third-party valuation expert might estimate that the value of ACME Corp is about $300 million given its current state and past performance.
Conclusion
With a difference between net worth and valuation, it is also important to be able to track your overall net worth as well. It would be ideal to compare the two annually to help determine whether or not you are making financial strides towards achieving your goals.
So hopefully, this article was helpful in distinguishing the important differences between net worth vs. valuation.