UK Accounting Glossary
Net worth is total assets minus its total liabilities. Put another way, net worth represents the owners’ interest in company assets, as opposed to liabilities, which represents creditors’ interest. If a firm has little net worth, its assets are mostly financed by debt, and it will have trouble paying its bills in hard times. (A company can have negative net worth — liabilities exceed assets — although bankruptcy is probably near.). But a high net worth company with few liabilities may be squandering opportunities by refusing to take out loans. Net worth has limits as an indicator, however, because it uses historical accounting figures, some of which won’t reflect current value. Moreover, net worth doesn’t indicate how liquid the company’s assets are, nor how immediate its liabilities. Net worth is also computed for people, the more fortunate of whom are “high net worth individuals.” But note that a newly minted doctor with a negative net worth of $50,000 from medical school loans has entirely different financial prospects than an unskilled labourer with the same negative net worth.
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This glossary post was last updated: 7th February 2020.