Updated July 12, 2023
Definition of Net Tangible Assets
Net Tangible assets can be referred to as the value of the assets of the company that has the physical existence like plant and machinery, equipment, immovable properties, accounts receivables, investments, cash, and equivalents, etc. and it is calculated after deducting the value of all the total existing liabilities of the company and the value of intangible assets which do not have any physical existence like goodwill, copyrights, know-how, patents, etc from the value of total assets of the company.
Explanation
For calculating tangible assets all the liabilities including the debentures and the preference share capital should be excluded from the value of total assets along with the value of Intangible assets such as patents, copyrights, know-how, trademarks, goodwill, etc. i.e., assets that do not have the physical existence. Tangible assets are calculated to know the real worth of the company. If the value of tangible assets is higher, then the company stands in a beneficial position. Tangible assets are also calculated to know the valuation of the shares of the company i.e., whether the shares of the company are undervalued or overvalued. If the company has a higher amount of tangible assets then the investors feel secure because, in case of the collapse of the company or winding up, tangible assets can be sold off to repay the stakeholders. So if the tangible assets are higher, the company tends to gain more attention from its investors.
Formula for Tangible Assets
Tangible assets are to be calculated as total assets less intangible assets and all liabilities. Tangible assets calculation gives the organization an idea about how much liquidity it can create by selling the assets and what is the actual worth of the organization as on the date.
The formula for Net Tangible Assets:
Net Tangible assets per share give the idea of whether the shares of the company are fairly valued or not.
If the value of tangible assets is greater than the fair value of a share listed on the stock exchange then the share is overvalued and if the tangible assets value is lesser than the share value then the share is said to be undervalued. The tangible assets per share also help the analyst to decide whether to buy or sell the shares.
Examples of Tangible Assets
A Ltd’sbalance sheet reflects total assets of $ 550,000 whereas $ 45,000 is the value of intangible assets. The company does not have the preference capital and the values of liabilities were $ 400,000.Calculate the tangible assets and tangible assets per share if the company has $ 15,000 shares of $ 10 each as per its balance sheet?
Solution:
Tangible Assets is calculated using the formula given below
Net Tangible Assets = Total Assets – Intangible Assets – Total Liabilities
- Net Tangible Assets = $550,000 – $45,000 – $400,000
- Net Tangible Assets = $105,000
Net Tangible Assets per Share is calculated using the formula given below
Net Tangible Assets per Share = Net Tangible Assets / No of Shares
- Net Tangible Assets per Share = $105,000 / 15,000
- Net Tangible Assets per Share = $7
Importance of Tangible Assets
The importance of tangible assets can be summarized as under:
- It helps to calculate the real worth of the company.
- It gives a sense of security to the investors.
- The accurate return on the investment can be calculated with the help of tangible assets and tangible assets per share.
- It gives the liquidity position of the company if winding up.
- It helps to compare the position with regard to the industry.
Difference Between Tangible Assets and Shareholders’ Equity
The difference between Tangible assets and Shareholders’ equity can be explained as under:
- Tangible assets are the value of all physical assets whereas shareholders’ equity is the value of shareholders’ fund.
- Net tangible assets are calculated as under:
Net Tangible Assets = Total Assets – Total Liabilities – Intangible Assets
Whereas the shareholders’ equity is calculated using the formula:
Shareholders’ Equity = All Assets – All Liabilities
- Assets calculation helps to determine the sure liquidity position of the company if winds up whereas shareholders’ equity help to determine funds available to shareholders if all assets have been sold off and liabilities have been paid off.
- Shareholders’ equity includes the value of intangible assets whereas tangible assets do not include the value of intangible assets.
Advantages
The advantages of tangible assets are as under:
- Finance facilities can be easily availed if the organization has more tangible assets.
- Tangible assets per share help to determine the valuation position of the shares in the market.
- It helps to determine the risk level of the organization if the investment in tangible assets is low then the organization is said to have a higher risk.
- Through investment in tangible assets, the organization can earn more as the assets are used for the business purpose which increases the production, sales, earnings, or other income for the organization.
Disadvantages
Disadvantages of tangible assets are defined as under:
- For finance companies the value of tangible assets is very fluctuating in nature hence the calculation becomes complex.
- Some assets are depreciable assets hence the tangible assets value per share goes on decreasing year by year if no new investment is made hence comparison of tangible assets per share with the fair value per share becomes unjustifiable.
- Some intangible assets like copyrights, patents, etc. actually contain lots of value that are being ignored in the calculation.
- All intangible assets which contribute to increasing the income of the organization are ignored in the calculation.
Conclusion
Tangible assets can be calculated as the value of all assets less the value of all liabilities and intangible assets. The tangible assets per share can be calculated as tangible assets divided by a number of shares which helps to determine whether the shares are undervalued or overvalued. However, some intangibles like patents, and copyrights, know how to contribute more in earning an income for the organization which is being ignored while calculating the tangible assets.
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