“Understanding a company’s net tangible assets is akin to reading its financial DNA.”
Before delving directly into net tangible assets, it’s important to understand what assets are? An asset is something you possess that holds value, whether it’s tangible items like a car, house, or computer, or intangible financial resources like money in your bank account or investments in stocks or bonds. Essentially, assets are possessions that can enhance your wealth or financial stability. After reading about assets it is easy to understand net tangible assets.
What is Net Tangible Assets(NTA) ?
Tangible assets are those with physical form or that can be touched, such as property, equipment, inventories, and cash. These are items listed on a company’s balance sheet. In contrast, intangible assets lack physical presence. Net tangible assets is a company’s overall physical holdings after deducting intangible assets and debts. Why company needs More Net Tangible Assets??
The reason is simple, NTA play a big role in helping a company get financing and convincing investors. When a company has more tangible assets than what it owes, it boosts confidence among lenders and investors. They feel more secure because if things don’t go as planned, the company can sell its physical assets to cover their investment. It’s like having a safety net in case things don’t work out as expected.
How to calculate Net Tangible Assets ?
There 6 steps to calculate Net Tangible Assets.
- Identify Tangible Assets: These are physical assets that can be touched and are listed on a company’s balance sheet. Examples include: Property, Plant, Buildings, machinery, vehicles, Raw Materials, Inventory, Accounts Receivable, Computers, Cash etc.
- Determine Fair Market Value (FMV) of Tangible Assets: This is the estimated value of these tangible assets if they were to be sold in the open market.
- Identify Intangible Assets: These are assets that don’t have a physical presence. Examples include: Brand names, logos, Goodwill, Patents, Copyrights etc.
- Identify Liabilities: These are the company’s debts, including both current and non-current obligations. Examples include: Accounts Payable, Long-Term Debt, Lease obligations, deferred revenue, etc.
- Determine Fair Market Value (FMV) of Liabilities: This is the estimated value of the company’s debts if they were to be settled in the open market.
- Calculate Net Tangible Assets: Net Tangible Assets = Total FMV of Tangible Assets – Total FMV of Intangible Assets – Total FMV of Liabilities
Example
Suppose we have Company XYZ, which manufactures electronic devices. Here’s a simplified breakdown of its balance sheet:
- Total Assets: $1,000,000
- Tangible Assets: $800,000
- Intangible Assets: $200,000
- Total Liabilities: $400,000
NTA = Total Tangible Assets – Total Intangible Assets = $800,000 – $200,000 = $600,000
Importance Of
Net Tangible Assets
Importance of Net Tangible Assets
Net Tangible Assets simplifies asset evaluation by focusing solely on tangible assets, providing a straightforward view of the company’s possessions. Companies with significant NTA find it easier to secure loans because they can use tangible assets as collateral, which gives lenders more confidence. NTA aids in evaluating a company’s financial health, such as its ability to meet obligations. Higher NTA often indicates greater stability and resilience against financial challenges.
Net Tangible Assets significance varies by industry. In sectors such as medical devices, intangible assets hold great value, whereas in fields like real estate, tangible assets are given more weight in assessing worth.
Net Tangible Assets per share
Net Tangible Assets per Share signifies the potential amount each shareholder might receive in a company liquidation. It aids in investment analysis, indicating whether the company’s shares are undervalued, overvalued, or accurately priced based on its net assets.
NTA per Share = Net Tangible Assets / Shares outstanding
Example
To calculate NTA per share, we need to know the number of shares outstanding. Let’s assume that Company XYZ has 100,000 shares outstanding in above example.
NTA per Share = NTA / Shares Outstanding = $600,000 / 100,000 shares = $6
$6 is the potential amount each shareholder might receive in a company liquidation.
Conclusion
Net Tangible Assets (NTA) simplify asset evaluation, aiding in financing and investor confidence. By focusing on tangible assets, NTA offers clarity in assessing a company’s financial strength. Calculated by subtracting intangible assets and liabilities from total tangible assets, NTA provides a realistic asset evaluation. NTA per share indicates potential returns in a liquidation scenario. However, its importance varies by industry. Overall, NTA is a crucial metric in financial analysis, offering insights into a company’s stability and investment viability.
Read about Discounted Cash Flow
https://finspace360.com/discounted-cash-flow-dcf-meaning-and-examples
