What It Is:
In finance, net assets refers to the value of a company's assets minus its liabilities. For individuals, the concept is the same as net worth.
How It Works/Example:
The formula for net assets is:
Net assets = Total assets - Total liabilities
Let's assume that Company XYZ's balance sheet reported $10,500,000 in assets and $5,000,000 in total liabilities. The company's net assets would be:
Net Assets = $10,500,000 - $5,000,000 = $5,500,000
It is important to note that most assets and liabilities on the balance sheet are listed at their book value rather than at their fair market value, and thus net assets doesn't necessarily represent the cash a company would have leftover if it sold all of its assets and paid all of its liabilities.
Why It Matters:
Net assets are virtually the same as shareholders' equity--both reflect the difference between what the company owns and what it owes. Typically, the higher a company's net asset value, the higher the value of the company.
Companies with negative net assets (or individuals with negative net worth) are usually in a lot of trouble. Frequently, one solution is to sell off assets in order to generate cash and pay down debt. Companies may also try to renegotiate their existing debt to lower the payments or principal due. Firms can also file for Chapter 11 bankruptcy, which allows them to restructure their debts. If none of these tactics are successful, a firm with negative net assets will eventually end up in Chapter 7 bankruptcy and will be liquidated.
To calculate a company's ability to generate profits from its net assets, an analyst can use the Return on Net Assets (RONA) profitability ratio.