Key Takeaways

● Net worth is the true wealth of a business or individual.

● Net worth is the value of total assets minus total liabilities.

● Analyzing changes in the net worth of an investment target is necessary before investing.

Understanding

For an individual or a business, net worth is the value of all their assets minus all their liabilities, showing how much they own.

Net worth is an indicator of the financial position of an individual or business.

Calculation

Assets = Liabilities + Owner's Equity

Assets - Liabilities = Owner's Equity

Net worth is the value of a company or an individual's equity.

For example, Company A's assets include a factory building worth $1 million, a car worth $10,000, and 10 pieces of office equipment worth $1,000.

All of its liabilities are bank loans of $800,000.

Thus, Company A's net worth is $211,000.

Net worth can be either positive or negative.

If the total debts of a company or individual are more than the total assets, its net worth will be negative.

Summary

Net worth is a critical way of knowing a person's or company's true wealth. Looking only at the assets may be misleading.

Therefore, investors need to focus on the net worth of an investment target and gauge the future business performance with changes in its assets and liabilities.