Understanding the classes of assets and how they affect the value of a potential investment is an important factor to consider when researching a stock. It can help you understand a little more about the liquidity and risks that a company faces. Here is how to calculate the net tangible assets (NTA) of a company.
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What Are Tangible Assets?
Businesses have two types of assets: tangible and intangible assets. Tangible assets are things that are used to produce a company’s products and services. They are things that can be touched, such as equipment, buildings, ingredients and inventory. Intangible assets are things that cannot be touched but still have value. They include things like patents, brand equity, copyrights and trade secrets.
Companies have two types of tangible assets. Current assets include items that are usually used within a year and that can be sold quickly to raise cash. These things include cash, inventory and marketable securities.
Fixed assets are things that the company uses in operations and that they will hold for more than a year. These things include the building, major equipment, vehicles, furniture and computer systems. These are things that the company could not operate without and are an essential part of day-to-day business.
Net Tangible Assets Formula
Creditors, banks and investors use the NTA formula to understand the value of a company. Tangible assets are easier to place a monetary value on than intangible assets. The NTA formula can help you determine if the company has sufficient assets in reserve that they could sell if something were to happen that caused a financial crisis in the organization. The company will list NTA on its balance sheet, which is used to calculate the book value of its stock. Let’s see how the NTA formula works.
Read More: What Is Included on a Balance Sheet?
Net Tangible Assets Example
Net tangible assets are calculated by determining the fair market value of the company’s physical and liquid assets. Then, the formula subtracts the fair market value of its liabilities. This gives you an idea of whether the company has enough assets that it could turn into ready cash if it were to have to pay back all of its liabilities at once.
Items included on the list of tangible assets might be physical property, cash, stocks, other investments and accounts receivable. Liabilities include accounts payable, long-term debt and other obligations of the company. Here is the NTA formula.
NTA = total assets – intangible assets – total liabilities
The formula is simple, but deciding which category to use for each asset be tricky. Let's look at an NTA example.
Let’s say that as of Dec. 31, 2020, ABC Company had total assets worth $40.18 million, total liabilities of $4.09 million and total intangible assets of $3.93 million.
NTA = $40.18 – $3.93 – $4.09
Its NTA would be $32.16 million.
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Determining Value Is Complicated
In this NTA example, the formula is simple, but determining the value of intangible assets can be considered more of an art than a science. It forces you to ask questions like, How much is the company logo and brand worth? What is the useful life of the asset? These questions are easy to answer when it comes to something like the company truck, but they become more difficult when they involve concepts and ideas.
As you can see, calculating NTA can give you a picture of the company’s financial health. The calculation itself is easy, but many nuances can be challenging. As an investor, it is a good idea not to take the number on the balance sheet at face value but to delve deep into the methods the company used to come up with the number.
- Access a company’s balance sheet information from the “Investors” section of its corporate website, from financial sites such as Forbes or the Wall Street Journal, or from the U.S. Securities and Exchange Commission website. If you visit the SEC website, choose the most recent quarterly report on Form 10-Q or annual report on Form 10-K for current balance sheet information.
- Take this calculation a step further to determine if purchasing stock in this company is a wise investment. Dividing the NTA by the number of shares currently on the open market, for example, tells you whether the company is pricing its stock fairly. In addition, you may easily determine how much you could expect to receive for each share of stock owned if the company were to liquidate.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.