What are Net Tangible Assets: Importance, Formula & Example

Introduction

In the world of finance, determining the value of a company’s assets is important in making informed decisions. One of the key measures used in this regard is net tangible assets, which offers insights into the tangible value of a company’s physical assets. This metric is most particularly important for investors, creditors, and business owners since it assesses the financial health of a company without the influence of intangible assets such as goodwill or intellectual property. 

In this blog, we will learn what net tangible assets mean, their significance, the formula used to calculate them, as well as its limitations.

What are Net Tangible Assets?

Net tangible assets are defined as the value of the physical or tangible assets of a company minus its liabilities and intangible assets. The tangible assets are physical assets that have some physical form and measurable value, such as property, plant, equipment, and inventory. 

On the other hand, intangible assets relate to items such as patents, trademarks, and goodwill of the company. They do not have a physical form but are a valuable part of the company. The NTA is one of the most critical indicators that provides a realistic overview of the tangible resources of the company and reflects a company’s financial health.

Importance of Net Tangible Assets

NTA is more than a pure financial measure; it reflects the basic tangible value of the firm.It is a key indicator to gauge the financial health of the firm and its long-term viability. Some of its key benefits are: 

• Investor confidence

  Investors usually leverage net tangible assets as an indication of how solid their investment is. A high NTA would indicate that the company has substantial physical assets that could, in need, be liquidated.

• Creditworthiness

  Lenders use net tangible assets to assess the risk involved in lending to a company. A higher NTA would mean that the company has enough assets, which could serve as collateral for loans.

• Mergers & acquisitions

  Net tangible assets is used in mergers and acquisitions cases for assessing the tangible value of a firm, excluding the possibly higher value of intangible assets.

• Financial health

  Through NTA, one can make an observation about the general financial health of an entity. This especially helps when the net tangible assets are compared against a company’s liabilities. 

Formula for Net Tangible Assets 

The formula for net tangible assets is straightforward. It gives an indication of the tangible worth of the company by deducting the intangible assets and total liabilities from the total assets. This figure can be useful when one is looking at the possible liquidation position of the company or its underlying value without the influence of intangible assets.

Where:

• Total Assets

  Total assets refers to the sum of the book values of all assets owned by an individual, company, or organization. It is a parameter that is often used in net worth debt covenants. The value of a company’s total assets is obtained after accounting for depreciation associated with the assets.

• Intangible Assets

  These would include patents, copyrights, trademarks, and goodwill, among others. They are important to the company and valuable in their own sense, but for net tangible assets calculation , they are excluded in order to deal solely with the physical assets.

• Total Liabilities

  This is the sum of all forms of financial debts, loans, accounts payable, and any other form of liabilities that a company owes. Deducting these from the total assets gives a better description of precisely what the company owns.

Example of Net Tangible Assets 

To understand NTA better, let us take an example of a hypothetical company, ABC Manufacturing Inc., and analyze what NTA tells us about the financial health of the company.

Scenario:

Total Assets: $15 million

Intangible Assets: $3 million

Total Liabilities: $6 million

Using NTA formula

Net tangible assets = Total Assets – Intangible Assets – Total Liabilities

Net tangible assets = $15 million – $3 million – $6 million 

= $6 million

Here, the value of ABC Manufacturing Inc. stands at $6 million in net tangible assets. This simply means that after liquidating all the physical assets and settling liabilities, the remaining value would be $6 million. The value does not account for the contributions from the intangible assets, such as intellectual properties or good will. 

This example underlines the importance of NTA as a conservative measure of a company’s worth, focusing on only those assets that may be physically realized and valued easily.

Advantages and Disadvantages of Net Tangible Assets

Although NTA gives a clear and relatively objective indication of the tangible value of a business, this measure is not without certain strengths and weaknesses. Understanding both the advantages and disadvantages of NTA helps stakeholders determine when and how to apply NTA in their analysis.

Advantages

• Clear Valuation

  NTA presents an unambiguous and transparent view of the tangible value of a company by excluding intangible assets, which can sometimes be overvalued and inflate a company’s worth.

• Risk Evaluation

  Investors and creditors are able to evaluate the risks associated with a company better by analyzing its net tangible assets which provides an overview of the company’s liquidity potential .

• Objectivity

  With tangible assets as the basis of NTA, it is less susceptible to manipulative influences, which can be done with metrics based on intangible assets.

Disadvantages

• Excludes Intangible Value

  NTA does not include intangible assets, which can sometimes be of immense value, particularly in technology or brand-driven companies. 

• Not Comprehensive

  Relying solely on NTA may lead to the overlooking of other important value areas of the company, such as intellectual property or brand equity. 

• Underestimation

  Firms with low levels of NTA can still be quite valuable because of their intangible assets, and this measure does not take that into account. This can impact factors such as credit worthiness of a company. 

Net Tangible Assets vs. Net Tangible Assets Per Share

Net tangible assets and net tangible assets per share (NTAPS) are closely related metrics, but they serve different purposes in financial analysis. Comparing NTA with NTAPS allows investors to understand the tangible asset value both on a company-wide basis and on a per-share basis. This distinction is important for those looking to assess the tangible worth of individual shares within a company. 

Key differences between NTA and NTAPS are: 

How HighRadius Can Help?

HighRadius offers a cloud-based Record to Report Solution that helps accounting professionals streamline and automate the financial close process for businesses. We have helped accounting teams from around the globe with month-end closing, reconciliations, journal entry management, intercompany accounting, and financial reporting.

Our Financial Close Software is designed to create detailed month-end close plans with specific close tasks that can be assigned to various accounting professionals, reducing the month-end close time by 30%.The workspace is connected and allows users to assign and track tasks for each close task category for input, review, and approval with the stakeholders. It allows users to extract and ingest data automatically, and use formulas on the data to process and transform it. 

Our Account Reconciliation Software provides an out-of-the-box formula set that can configure matching rules and match line-level transactions from multiple data sources and create templates to automate various transaction processing required for month-end close. Our solution has the ability to record transactions, which will be automatically posted into the ERP, automating 70% of your account reconciliation process. 

Our AI-powered Anomaly Management Software helps accounting professionals identify and rectify potential ‘Errors and Omissions’ on a daily basis so that precious resources are not wasted during month close. It automates the feedback loop for improved anomaly detection and reduction of false positives over time. We empower accounting teams to work more efficiently, accurately, and collaboratively, enabling them to add greater value to their organizations’ accounting processes.

FAQs

1. Can net tangible assets be negative?

Yes, net tangible assets (NTA) can be negative if a company’s liabilities exceed its tangible assets. This indicates that the company owes more than it owns in physical assets, which could signal financial instability or excessive debt.

2. Does net tangible assets include cash?

Yes, net tangible assets (NTA) include cash, as cash is considered a tangible asset. Cash, along with other physical assets like property and equipment, is factored into the total assets portion when calculating NTA.

3. Is high net tangible assets good or bad?

High net tangible assets (NTA) are generally seen as positive, indicating strong tangible asset backing. However, it might also suggest underutilized resources or insufficient investment in growth through intangible assets.

4. What are net tangible assets on the balance sheet?

Net tangible assets (NTA) on the balance sheet represent the value of a company’s physical assets after deducting liabilities and intangible assets. It reflects the tangible worth of the company.