Net Worth

The amount by which assets exceed liabilities.

The concept of net worth can be applied to both individuals and businesses, and serves as a key measure of that entity’s value. While consistent increases in net worth indicate good financial health, net worth can also be depleted by annual operating losses or a significant drop in the value of the individual or business’s asset values relative to liabilities.

Can net worth be negative?

Yes, there is such thing as negative net worth, which is where total liabilities exceed total assets. Lending institutions carefully consider net worth to determine an individual or business’s financial health, and if the entity’s net worth is negative, the creditor may not be greatly confident that the company will be able to repay its loans.

Practical Application Example

“ An individual or company’s net worth can be calculated simply by subtracting their total debt from their total assets. So if the given entity has total assets of £100,000 and £20,000 of total debt, their net worth would be £100,000 - £20,000 = £80,000. ”