The value representing total assets, excluding those considered intangible, less total liabilities, provides a clear picture of an entity’s or individual’s solvency. Intangible assets, such as goodwill, patents, and trademarks, are subtracted from total assets. For example, if a company possesses total assets of $500,000, consisting of $400,000 in tangible assets and $100,000 in goodwill, and its total liabilities amount to $200,000, the resulting figure is $200,000.
This measure offers a conservative view of financial strength. It is particularly useful in assessing creditworthiness because it focuses on assets that can readily be converted to cash to cover debts. This method of evaluation reduces the risk associated with relying on valuations of assets that may be difficult to sell or whose value is subjective. Historically, lenders and investors have utilized this figure to gain confidence in the stability and sustainability of a borrower or investment target.
