The concept of net tangible assets reflects the total physical assets of a company, subtracting all intangible assets and liabilities. In essence, net tangible assets focus on tangible elements such as property, plant, and equipment (PP&E), as well as inventories and cash assets. Physical assets hold a concrete presence on a company’s balance sheet, while intangible assets lack a physical form. Assessing a company’s net tangible assets aids in securing financing and gauging its risk exposure.
Key Takeaways
- Net tangible assets encompass all the physical assets a company possesses minus any intangible assets and liabilities.
- These assets are recorded on a company’s balance sheet and highlight its book value.
- The formula to calculate a company’s net tangible assets is: Net Tangible Assets = Total Assets - (Liabilities + Par Value of Preferred Shares + Intangible Assets such as goodwill, patents, trademarks).
- Evaluating net tangible assets allows analysts to focus on a firm’s physical assets independently.
- Companies leverage the value of net tangible assets to obtain financing and determine their risk levels.
Delving into Net Tangible Assets
As previously stated, net tangible assets refer to any physical assets subtracting intangible assets and liabilities. To calculate this value, a business should consider the fair market value (FMV) of its tangible assets and deduct the FMV of its liabilities. Physical assets include elements that are tangible and listed on a company’s balance sheet, such as:
- PP&E
- Raw materials
- Inventory
- Accounts receivable
- Finished goods
- Office equipment and computer software
- Cash
Contrarily, intangible assets have no physical form—examples include trademarks, goodwill, patents, and copyrights. Liabilities encompass the company’s monetary obligations, such as current and non-current debts, accounts payable, and long-term debt.
For instance, assume a company has total assets worth $1 million, total liabilities of $100,000, and intangible goodwill valued at $100,000. The net tangible asset would be $800,000, derived by subtracting $200,000 (sum of liabilities and goodwill) from the total assets of $1 million.
This net tangible asset value may also be referred to as the company’s net asset value (NAV) or book value. This metric is crucial as it reveals the company’s risk profile, including liquidity and solvency, and aids in securing financings for future objectives.
Weighing the Pros and Cons
Assessing a company’s tangible assets independently allows its management to gain insights into its asset position, excluding intangible or inherently tricky to value assets. For instance, the return on assets (ROA) is often more precise when calculated using net tangible assets.
However, the value of net tangible assets differs across industries. Some industries, like medical device manufacturing, heavily rely on valuable intangible assets, making it crucial to consider a company’s price-to-book (P/B) ratio and compare it within similar industries for performance analysis.
Pros
- Provides a clear asset position, excluding intangible assets
Cons
- The significance can differ across industries, especially for those with substantial intangible asset values
Net Tangible Assets vs. Net Tangible Assets Per Share
Certain companies opt to use net tangible assets per share instead of the overall net tangible assets figure. To calculate net tangible assets per share, divide the net tangible assets by the number of outstanding shares of common stock. For example, if a company exhibits $1 million in net tangible assets and has 500,000 outstanding shares, the net tangible asset value per share would be $2.
This parameter proves especially useful for comparative analysis within specific industries. For example, auto manufacturers might have high net tangible assets per share, while software companies with primarily intangible assets might report a significantly lower figure. Therefore, it’s essential to utilize this measure only for companies within the corresponding industry.
Real-World Examples
Examining net tangible assets for industry giants provides calculated insights:
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Amazon: On Dec. 31, 2020, Amazon reported total assets of $321.2 billion, total liabilities of $227.8 billion, and goodwill of $15.01 billion. The resulting net tangible assets sat at $78.39 billion ($321.2 billion - $227.8 billion - $15.01 billion).
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Meta: As of Dec. 31, 2019, Meta detailed total assets of $133.4 billion, total liabilities of $32.3 billion, intangible assets of $894 million, and goodwill of $18.7 billion. Subtracting its intangible assets, goodwill, and total liabilities, Meta’s net tangible assets stood at approximately $81.5 billion.
Related Terms: Net Asset Value, Book Value, Intangible Assets, Financial Liabilities.
References
- U.S. Securities and Exchange Commission. “Form 10-K, AMAZON.COM, INC.”
- U.S. Securities and Exchange Commission. “Form 10-K, Facebook, Inc”, Page 73.
