Movie Case Study
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.
This blog, Learning Perspectives, will explore what is technically wrong in the words that he uses.
What is the net worth of a business?
The net worth of a company is measured by subtracting liabilities from assets. Assets are resources owned by the company while Liabilities or debt are what the company owes. Hence, technically when the lawyers said ‘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 crores’, it would have made more sense.
Net Worth of an Individual:
The net worth of an individual is also quite similar, it would include:
- Individual’s bank and cash balance
- A vehicle
- Home’s Value
- Savings and Investments
- Retirement Fund
All kinds of loans such as home loans, personal loans, or vehicle loans and debts would be excluded from the above assets to reach 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 into 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?
The 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 skeptical. This can also be referred to as negative net worth. This can signal, debt-reduction. Debt reduction will lead to fewer interest payments and can save both individuals and businesses. Jaiswal Textile needs to work towards reducing the debt of the company.
Market Capitalization
Market capitalization or market cap is a separate metric that is based on the stock price of the company. This should not be confused with net-worth calculation. The 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 good overall health, will show rising net worth too.
[…] in its capital mix can run out of money for interest payment when it goes into losses. It can have negative net worth when it is suffering losses. This can lead to bankruptcy and winding up of the company. While this […]