A balance sheet is like a company's report card. It displays the company's potential and gives investors information about the company's financial condition, including liabilities and overall value. Investors can use this information to make decisions about their involvement with the business. Total equity and net assets are two terms that give insight into a company's balance sheet.
A company's total equity represents the amount of capital it has available for use. If the company is a sole proprietorship, its total equity is the balance of the owner's capital account. If the business is a partnership, the total equity is the sum of the balances in all of the owner's capital accounts. If the business is a corporation, its total equity is the amount of money shareholders have invested plus the company's income and less dividends paid to shareholders. For example, a company with $20 million of investments from shareholders, $5 million worth of income and $2 million paid in dividends would have a total equity of $23 million [$20 million + ($5 million - $2 million) = $23 million].
A company's net assets consist of all of its assets minus its liabilities. To calculate net assets, you must combine a company's liquid and non-liquid assets and subtract the total of the company's debts. For example, if a company has $20 million in available capital, $10 million in other assets and $2 million in liabilities, then the company's net asset value is $28 million [($20 million + $10 million) - $2 million = $28 million].
Unlike total equity, which includes only liquid assets, net asset value includes both liquid and non-liquid assets. Total equity represents working capital, while net asset value represents a company's true monetary worth. Investors typically use net asset value to determine whether the company is a solid investment. If the net asset value is low, it indicates that the company has taken on too much debt, while a high net asset value indicates prosperity.
Per Share Net Value
You can also use a company's net asset value to determine per share net value, which is the net asset value of a single share of the business. To calculate per share net value, you must divide the net asset value by the number of shares owned by investors. For example, a company with a net asset value of $20 million dollars and 10 million investor-owned shares has a per share net value of $2 ($20 million/10million = 2). Investors use per share net value to determine the worth of the shares they own.