DEFINITION: The phrase “net worth” refers to the valuation of the difference between an individual’s or corporation’s assets less its outstanding liabilities.
The metric of net worth plays a crucial role in assessing a company’s economic well-being. It offers an invaluable snapshot of the company’s present financial standing.
Occasionally referred to as “net wealth,” an individual’s net worth finds application in numerous financial contexts.
Specifically, net worth determines eligibility for certain kinds of investment approaches or financial instruments, such as hedge funds, structured products, or other intricate and unconventional investments.
In popular culture, the net worth of celebrities and other well-known individuals has become an object of widespread fascination, leading to investigations into such individuals’ net worth and its public disclosure in the media.
ETYMOLOGY: The phrase “net worth”was probably in use by 1910.
The English adjective “net,” used in the financial sense discussed here, derives from Middle English net, meaning “bright” or “clean,” which, in turn, derives from Middle French net, meaning “clean.” The latter ultimately derives from Latin verb niteo, nitēre, meaning “to shine,” “to be bright,” or “to glitter.”
The English “net” may have also been influenced by Italian netto, meaning “net” in the financial sense.
Moreover, modern English word “net,” in the financial sense, is allied to the adjective “neat,” meaning “pure” or “free from admixture,” which is also derived from Middle French net.
The English noun “worth” is attested from the eleventh century.
“Worth” derives, via Middle English, from Old English weorth, “a specified value,” which is akin to Old High German werd, “worth.”
USAGE: Net worth is calculated by deducting liabilities from assets.
An “asset” refers to anything that is owned that possesses a monetary value.
A “liability,” in contrast, refers to any obligation that consumes resources, such as a loan, an account payable, a mortgage, or any of a large number of similar debts.
Net worth may be classified as either positive or negative.
A positive net worth implies that assets surpass liabilities, whereas a negative net worth means that liabilities exceed assets.
A positive and growing net worth indicates a healthy financial condition, while a diminishing or negative net worth indicates the need for emergency course correction to avoid bankruptcy.
Enhancing net worth can be achieved in either of two ways, or through a combination of them both:
- By diminishing liabilities, while maintaining or increasing assets
- By augmenting assets, while keeping liabilities constant or decreasing
The concept of net worth is widely applicable, from real entities, such as individuals and companies, to abstract statistical constructs, such as sectors and even entire nations.
Let us look more closely at the two most important of these, individual and corporate new worth:
Corporate net worth
In the business context, net worth may also be referred to as “book value” or “shareholder equity.” The balance sheet is also recognized as a net worth statement.
A company’s equity may be quantified as the difference between the total value of its assets minus the total value of its liabilities. Note that the figures on a company’s balance sheet reflect historical costs or book values, rather than current market values.
Lenders examine a business’s net worth to assess its financial well-being. If total liabilities exceed total assets, a creditor might think twice about the company’s capacity to service a new loan.
A consistently profitable company will experience an increasing net worth or book value, provided that its earnings are not entirely distributed to shareholders as dividends.
In the case of a publicly traded company, an increasing book value frequently correlates with a rise in its stock price.
Individual net worth
An individual’s net worth is calculated by subtracting his liabilities from his assets.
Individual liabilities may encompass debts like home mortgages, car loans, student loans, and credit card balances. Liabilities may also comprise obligations that necessitate payment, such as utility bills and taxes.
An individual’s assets usually consist of such things as checking and savings account balances, the value of real property, a vehicle’s market value, the worth of securities like stocks or bonds, and others. Net worth is what remains after liquidating all assets and settling personal debts.
Individuals with significant net worth are sometimes called “high net worth individuals” (HNWI). They constitute the key demographic for wealth managers and investment advisors.
The Securities and Exchange Commission (SEC) recognizes investors with a net worth of at least $1 million (exclusive of their primary residence) as “accredited investors.” This status authorizes them to participate in unregistered securities offerings.