Tangible net worth is a simple but incomplete measure of an individual’s or company’s financial strength. The measure does not include intangible assets, such as patents, copyrights or goodwill.
There is no universally accepted method for valuing these intangible assets, so they are often excluded from financial statements and calculations such as tangible net worth.
For example, if a company has developed a new product that it thinks will be very successful, it may show this development project on its balance sheet as an asset. However, until the product is actually sold to customers and generates revenue, there is no way to determine if it has any real value.
It may be more accurate to show the development project on the balance sheet at cost rather than an amount that reflects the potential success of the product.
In this article let us discuss some limitations of Tangible Net Worth
It doesn’t reflect the emotional value of your company.
It’s only as accurate as last year’s tax return.
It does not reflect the value of goodwill and intangibles
It does not reflect the investments of other partners.
It excludes the reinvestment of profits
Over-estimate or under-estimate the asset value. This will affect the net worth.
Tangible assets are easier to measure than intangibles, but that doesn’t necessarily make them more valuable.
Tangible net worth isn’t entirely useless, however. It can be useful in some industries or even in periods of economic uncertainty.
As with many financial ratios, tangible net worth should be considered in the context of similar numbers for other companies in its industry.
Tangible Net Worth can change quickly and dramatically depending on company performance.
The higher the debt levels in a company, the lower the Tangible Net Worth of that company.
Tangible net worth doesn’t often take into account the legal value of intellectual property
The cash flow or income stream associated with tangible net worth can depreciate or grow, but the ratio does not reflect that.
Tangible net worth has its limitations, so it is not a good indicator of a company’s overall value.
To some, it may seem like calculating your financial worth as a tangible value is the only way to properly evaluate your wealth. But, in reality, it’s just one way to approach understanding and managing your finances.
Ultimately, whether or not you believe that tangible net worth is the best method for evaluating your net worth, there are still other ways to take control of your finances and become better at budgeting.
We hope this article has at least helped quantify how tangible net worth does not always equate to financial success.