What are Net Assets?
Definition: A company’s net assets can be calculated by subtracting its total liabilities from its total assets. In other words:
Net assets = Total assets – Total liabilities
The net assets figure represents the assets which remain after paying off all liabilities.
What does Net Assets mean?
Net assets tell us what a company owns after it pays off what it owes. In the case of a proprietorship, net assets represent the owner’s equity. If the organization is a corporation, net assets are equal to the stockholders’ equity.
The net assets figure is important because it tells us about the strength of a company’s balance sheet. Consider an organization that has $100 million in total assets and $110 million in total liabilities. Its net assets are negative. In a situation like this, additional capital has to be injected into the company. If this is not done, the company may find it difficult to survive.
There is another way in which a firm’s net assets may increase. If the profits that a company makes are retained and not distributed in the form of dividends, its net assets will go up.
If a company’s net asset figure is increasing over the years, it is likely to be financially sound. On the other hand, if the net asset figure follows a downward trend, it could be a sign of financial stress and the company may need to be recapitalized.
Example of Net Assets
Devon Van Lines is a moving company that operates both locally and internationally. At the end of December 2017, its total assets are $42 million and its liabilities stand at $24 million.
The company’s net assets are:
Total assets – Total liabilities
$42 million – $24 million.
On December 31, 2018, Devon Van Lines net assets or owner’s equity is $18 million
The net assets figure is an important indicator of a company’s financial strength. It tells us the amount that will be left over after the company pays off all its liabilities.