01 December 2012
The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities. In the business context, net worth is also known as book value or shareholders' equity.
01 December 2012
To calculate the net worth ratio, first compile the net profit generated by the company. The profit figure used should have all financing costs and taxes deducted from it, so that it accurately reflects the profit available to shareholders. This is the numerator in the formula. Next, add together the capital contributions made by shareholders, as well as all retained earnings; this is the denominator in the formula. The final formula is:
Net after-tax profits Shareholder capital + Retained earnings
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