Tangible Net Worth

Key takeaways
* Tangible net worth (TNW) measures the value of a company’s or individual’s physical assets after subtracting liabilities and intangible assets.
* Formula: TNW = Total assets − Liabilities − Intangible assets.
* Lenders use TNW to assess collateral value and set borrowing limits; it is a rough proxy for liquidation value.
* TNW can understate value for businesses with significant intangible assets (intellectual property, goodwill) and can be affected by subordinated debt.

What is tangible net worth?

Tangible net worth is the net value of tangible (physical and financial) assets after removing liabilities and intangible assets such as patents, trademarks, and goodwill. It represents the portion of value that can typically be converted to cash more readily in a liquidation.

Typical tangible assets
* Cash and cash equivalents
* Accounts receivable
* Inventory (finished goods)
* Equipment and machinery
* Buildings and other real estate
* Vehicles and major personal property
* Marketable investments (where applicable)

For individuals, TNW commonly includes home equity, other real estate, bank and investment accounts, and major personal assets (cars, jewelry), excluding minor personal items.

How to calculate TNW
* Locate total assets, total liabilities, and intangible assets on the balance sheet.
* Apply the formula: TNW = Total assets − Liabilities − Intangible assets.
* For individuals, use the same logic: tangible assets − total debt liabilities.

Practical steps:
1. Sum all tangible assets.
2. Subtract total liabilities (loans, mortgages, payables).
3. Subtract any recorded intangible assets.

Use by lenders and creditors
* Lenders often focus on TNW when determining collateral value and loan sizing.
* Loan agreements and credit lines may include covenants that require TNW to remain above a specified threshold.
* If a borrower defaults, secured tangible assets can be seized to satisfy claims.

Limitations and complications
* Ignores intangible value: Firms with valuable intellectual property, strong brands, or goodwill can have low TNW despite high economic value.
* Subordinated debt: Debt that ranks below senior obligations can complicate TNW calculations—subordinated claims may not be effectively collectible in liquidation and are often excluded from usable asset value.
* Market value vs. book value: Balance-sheet figures may reflect historical cost rather than current market values, causing TNW to diverge from realizable liquidation proceeds.

What is a “good” TNW?
* There’s no universal benchmark—“better” TNW generally means higher and positive.
* Compare TNW to peer companies within the same industry to set reasonable expectations.
* Positive TNW indicates tangible assets exceed liabilities; negative TNW is a warning sign for creditors and investors.

Do financial statements show TNW?
* Companies rarely report TNW explicitly, but the components needed to calculate it (total assets, liabilities, intangible assets) are disclosed on the balance sheet.

Conclusion

Tangible net worth is a straightforward measure of a company’s or individual’s physical-asset base after liabilities and intangible assets are removed. It is useful to creditors and for assessing liquidation value, but it can significantly understate true economic value for businesses with substantial intangible assets. Use TNW alongside other valuation metrics for a fuller financial picture.