You may have heard of the term “net worth” when discussing some of the world’s richest individuals like Jeff Bezos and Elon Musk, who have net worths well into the hundreds of billions. But what does it actually mean? Do these people have $200 billion sitting in a bank ready to be spent whenever they like? Well, not really. Make no mistake, someone with such a high net worth probably has plenty of cash on hand. But net worth as a concept goes far beyond a bank account balance or a yearly income. Rather, net worth is composed of the value of every single asset owned, minus any debts owed. Net worth can be calculated for an individual or for a company and provides crucial insight into their current financial state.
An asset can be literally anything that has monetary value. Most people’s biggest asset is their home (assuming they own it) and other major assets might include bank accounts, stocks, cars, and jewelry. A liability is a debt, an obligation that depletes resources, such as a loan. As net worth takes these liabilities into account, it is certainly possible for net worth to be negative. Obviously, a positive or improving net worth is an indicator of good financial health, whereas a negative net worth indicates a worrisome trend in liabilities relative to assets. High net worth individuals (HNWIs) are a subset of people with a net worth exceeding $1 million—excluding their primary residence.
For a company, net worth may also be referred to as “shareholders’ equity” or a “balance sheet.” A balance sheet would not be adjusted for inflation and would reflect the actual cost or expenditure at the time it was made. Any investor should fully investigate a company’s balance sheet prior to buying stock, lending money, or making an early angel investment in order to get as complete of an idea as possible of the company’s financial health. If a business is seeking a loan, any lender would certainly scrutinize this information, just as they would for an individual. A consistently profitable company will register a rising net worth so long as these earnings are not totally distributed to shareholders as dividends. For a public-traded enterprise, a rising book value will often be accompanied by an increase in the value of its stock price.