One of the financial parameters which lenders care a lot about when deciding whether or not to finance a company is its tangible net worth. It represents the total of its tangible assets like land, building, machinery, inventory, etc.
If there is any party which is most concerned with the tangible net worth, it is the lender. When a company approaches a lender and asks for a significant amount of money as a loan for expansion purposes, the lender will no doubt be a little wary.
The lender will view all the finances of the company, its performance, its ability to generate revenue and its ability to pay back the loan. Of the parameters it chooses to examine when they evaluate whether or not the company will pay back the loan, is the tangible net worth of the company.
One look at the word will tell you that it has got to do some thing with tangibility and the market value of the company. It is the amount of money that the company would realize, should it go into the market and sell all of its tangible assets. The distinction between tangible and intangible assets needs to be made here.
Tangible assets are those which can actually be touched, felt and sold. Intangible assets include goodwill, trademarks and patents which the company has. But, while intangible assets command a pretty good value, no one in the market will be willing to ‘buy’ goodwill, unless they buy the company outright. Therefore, tangible assets include all such items which have a resale value.
Let’s go back to the reference about the lender here. When a lender evaluates whether or not to give you a big loan, the lender no doubt wants to know if you will be able to pay it back. Should you default on the loan or become unable to pay the loan, the lender would like to have some sort of security against the loan.
And by calculating the worth of your tangible assets, the lender knows that in case of default, just how much you will be able to raise, should you sell your tangible assets. If the tangible net worth of the company is well above the amount of loan being given, and there are not many liabilities tied to the assets already, then the lender will have no qualms about giving the money to the company.
Now from the above section, you understand that the two things associated with the tangible net worth is the tangible assets present with the company and the liabilities attached to them. Calculating it will also take into consideration the following factors.
Tangible Net Worth = Total Assets – Intangible Assets – Liabilities
As you can see, the tangible net worth is a pretty important consideration from the point of view of the lender, to be sure that the company has enough funds to pay back the money owed. This is what makes it such an important financial management variable.