What is Net Worth of a Business?

Learn about Net Worth with Govinda

Case breakdown: Movie Money Hai toh Honey Hai

The scene that you just saw shows a lawyer reading the financials of the company. He says ” As of 27th January 2008, Jaiswal Textiles Private limited assets and Liabilities’ total net worth is Rs. 1,000 crores (10^7).  To create a dramatic effect in the movie he later reveals the loan owed by the company is Rs.1,200 crore.

In this blog, Learning Perspectives, will explore what is technically wrong in the words that he uses.

What is Net-Worth?

Net worth of a company is measured by subtracting liabilities from the assets.  Assets are resources owned by the company while Liabilities or debt is what the company owes. Hence, technically when the lawyers said that ‘assets and liability’s net worth’, it doesn’t make sense.

If he would have said ‘ total value or the total Assets in the books are 1,000 crore’, it would have made more sense.

The net worth of an individual is also quite similar, it would include:

  1. Individual’s bank and cash balance
  2. A vehicle
  3. Home’s Value
  4. Savings and Investments
  5. Retirement Fund

All kinds of loans such as home loan, personal loan or a vehicle loan and debts would be excluded from the above assets to reach to the net worth figure.

Net Worth= Assets- Liabilities

People with high net-worth are referred to as high net worth individuals. Many players, celebrities and businessmen fall in this category. According to Forbes, Mukesh Ambani’s net-worth is US $92.6 billion (Sep, 2021).

How to Figure out the Net-worth of a Business?

Net worth of a business is the value of shareholder’s equity on the balance sheet. Lenders and creditors, on a regular basis calculate this value to understand the company’s stability. If their liabilities are more than the assets (similar to the scene you saw), then creditors’ become skeptic. This can also be referred to as a negative net worth. This can signal towards, debt-reduction. Debt reduction will lead to less interest payments and can save both individual and the business. Jaiswal Textile needs to work towards reducing the debt of the company.

Market capitalization or Market cap is a separate metric which is based on stock price of the company. This should not be confused with net-worth calculation. Formula for calculating this is:

Market Cap= No. of Outstanding shares*Market price of the share

Apple’s market cap is close to $2 US trillion. This is higher than India’s GDP and many others.

A business, which continuously records profit and maintains a good overall health, will show rising net-worth too.

Written by: Ms. Gitika Chandra

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