Tangible assets are the assets which have a physical presence such as property, plant and equipment, furniture and fixtures, inventory, trade receivables, and cash instruments. Net Tangible Asset is an accounting term which is computed as the company's total value of tangible assets and subtracting any value of liabilities within the company. In this calculation, the fair market value of a company’s liabilities is subtracted from the fair market value of its tangible assets. Long-term debt, trade payables and other similar obligations come under the liabilities part. Net Tangible Asset is known by different names such as ‘net asset value’ or ‘book value.’
The formula to calculate the Net Tangible Assets is:
Net Tangible Assets = Total assets – Intangible assets – Total liabilities
The net tangible asset is important for a company as it allows its management team to analyze the position of its asset without considering the obsolete assets or any intangible asset which is difficult to value. For example, the Return on Asset (ROA), a ratio that shows how much profit a company is able to generate relative to its total assets, is usually more reliable when net tangible assets are used for calculating it.
A company with high Net Tangible Assets is able to obtain acquisition financing or any other financing more efficiently as it owns more assets to use as collateral for the loans. For instance, two companies A and B, both are valued at $4 million based on their estimated future cash flows. Company A and B have net tangible assets of $3 million and $1 million respectively. It is easy for a person acquiring the company to obtain acquisition financing for Company A as the company has significantly more assets to provide as collateral to the bank. Company A also represents a lower level of risk since there is a higher asset base available with the company to liquidate if under any circumstance the company ever becomes insolvent.
Net Tangible Assets can also be used to assess the company’s solvency and liquidity levels. For instance, it can be used to calculate total debt to total asset ratio to assess a company’s total amount of debt relative to assets.
However, the derivation of net tangible assets varies across industries. For instance, medical device manufacturers have high levels of valuable intangible assets such as patents, trademarks, etc. Therefore, in this case, it is preferred to look over the other ratios like company's price-to-book (P/B) ratio, usually used by people to compare a firm's market to book value and compare it against similar companies to determine its performance.
For example, if a company has total assets of $1,000,000 which includes $300,000 as cash, $100,000 as goodwill, $400,000 as property and equipment, $100,00 as trademarks, and $100,000 as patents. The total liabilities are reported as $100,000. Therefore, to calculate Net Tangible Assets, we will subtract intangible assets of $300,000 ($100,000 each for patents, trademarks, and goodwill) and total liabilities of $100,000 from the total assets of $1,000,000 to arrive at $600,000.
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