- Net Tangible Assets — Learn How to Calculate Net Tangible Assets
- Formula for Net Tangible Assets (NTA)
- Example of Net Tangible Assets (NTA)
- Importance of Net Tangible Assets (NTA)
- Net Tangible Assets (NTA) per Share
- Formula for NTA per Share
- Example of NTA per Share
- Additional Resources
- Tangible Assets
- Accounting for Tangible Assets: Cost Components
- Cost of Land
- Land Improvements
- Equipment, Machinery, etc
- Net Tangible Assets
- About assets
- What are intangible assets?
- Related entity loans
- NTA and financial category
- Tangible vs. Intangible Assets
- Tangible vs. intangible assets
- Tangible assets
- Intangible assets
- List of tangible assets vs. intangible assets
- Tangible vs. intangible assets on the balance sheet
- Tangible assets and intangible assets in accounting
- Depreciation and amortization
- Tangible vs. intangible assets and taxes
- Net Tangible Assets | Calculate Net Tangible Assets Per Share
- Net Tangible Assets Formula
- Net Tangible Assets Example
- Starbucks Net Tangible Assets Calculation
- Starbucks (2017)
- Starbucks (2016)
- Significance and Use of NTA
- Net Tangible Assets Per Share
- Example of Net Tangible Assets Per Share
- Recommended Articles
- Tangible vs Intangible | Top 8 Best Differences (With Infographics)
- Assets are divided into 3 main categories as per below
- Physical Existence:
- Tangible Assets
- Intangible Assets
- Head to Head Comparison between Tangible vs Intangible (Infographics)
- Key Differences between Tangible vs Intangible
- Tangible vs Intangible Comparison Table
- Conclusion – Tangible vs Intangible
- How to Use Net Tangible Assets to Analyze Stocks
- Net Tangible Assets Example: AMZN Balance Sheet
- Practical Metrics to Use with Net Tangible Assets
- How Balance Sheets Were Historically Constructed vs. the Business Models of Today
Net Tangible Assets — Learn How to Calculate Net Tangible Assets
Net Tangible Assets (NTA) is the value of all physical (“tangible”) assets minus all liabilitiesTypes of LiabilitiesThere are three primary types of liabilities: current, non-current, and contingent liabilities. Liabilities are legal obligations or debt owed to another person or company.
In other words, liabilities are future sacrifices of economic benefits that an entity is required to make in a business.
In other words, NTA are the total assets of a company minus intangible assetsIntangible AssetsAccording to the IFRS, intangible assets are identifiable, non-monetary assets without physical substance.
all assets, intangible assets are those that are expected to generate economic returns for the company in the future. As a long-term asset, this expectation extends beyond one year. and total liabilities. The total value of net tangible assets are sometimes referred to as the company’s “book value” or “net asset value.”
Formula for Net Tangible Assets (NTA)
NTA = Total assets – Intangible assets – Total liabilities
- Total assets include tangible and intangible assets and can be found on a company’s balance sheet.
- Intangibleassets are those that lack a physical form – such as goodwillGoodwill Impairment AccountingA Goodwill Impairment occurs when the value of goodwill on a company's balance sheet exceeds the tested accounting value by the auditors resulting in a write-down or impairment charge. Per accounting standards, goodwill should be carried as an asset and evaluated yearly. Companies should assess if an impairment is, trademarks, copyrights.
- Total liabilities include current and non-current liabilities and can found on a company’s balance sheet.
Example of Net Tangible Assets (NTA)
For example, Company A reports total assets of $1 million, total liabilities of $500,000, intangible assets of $200,000. To calculate the NTA:
NTA = $1 million – $200,000 – $500,000 = $300,000
Importance of Net Tangible Assets (NTA)
Understanding the amount of NTA is important because:
- NTA allows management to determine its asset position without considering intangible assets. Essentially, NTAs exclude difficult-to-value intangible assets.
- A company with high NTA is able to obtain acquisition financing more easily since it owns more assets to use as security for loans.
- NTA can be used to determine company risk levels such as solvency and liquidity.
It is important to know that although determining the NTA for a company offers benefits, its usefulness varies greatly across industries. For example, medical device manufacturers own intangible assets that are far more valuable than their tangible assets. On the other hand, real estate holding companies own little to no intangible assets.
Net Tangible Assets (NTA) per Share
Net tangible assets per share (NTA/share) is an extension of NTA that shows, in theory, the money that each shareholder would receive if the company were to liquidate. The NTA/share is a useful ratio in investment strategy as it can help determine whether a company is undervalued or overvalued or whether the share price accurately reflects the net assets of the company.
Formula for NTA per Share
Net Tangible Assets per Share = NTA / Shares outstanding
Example of NTA per Share
Recall from the example above where Company A reported total assets of $1 million, total liabilities of $500,000 and intangible assets of $200,000 for a resulting $300,000 in net tangible assets. Now, assume that there are 100,000 shares outstanding. To determine the NTA per share:
NTA per share = $300,000 / 100,000 = $3 per share
If shares of this company were trading on the market at $3 per share, then the NTA per share figure would imply that the current share price of Company A is at fair market value.
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- Types of AssetsTypes of AssetsCommon types of assets include current, non-current, physical, intangible, operating, and non-operating. Correctly identifying and
- Net Identifiable AssetsNet Identifiable AssetsNet Identifiable Assets consist of assets acquired from a company whose value can be measured, used in M&A for Goodwill and Purchase Price Allocation.
- Projecting Balance Sheet ItemsProjecting Balance Sheet Line ItemsProjecting balance sheet line items involves analyzing working capital, PP&E, debt share capital and net income. This guide breaks down how to calculate
- Valuation MethodsValuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent
Home Accounting Fixed Assets Tangible Assets
Tangible assets are long-lived assets which have physical existence. They are also referred to as property, plant and equipment (PPE). They are capitalized on balance sheet and depreciated over their useful lives.
For an asset to be classified as a tangible asset, it must meet the following conditions:
- It must be tangible, i.e. it must have physical existence,
- It must be non-current, i.e. it must generate economic benefits over a period of more than one year or more than one operating cycle, and
- It must be operating in nature, i.e. it must be expected to be used in the main operations of the business.
Tangible assets can also be referred to as non-current operating assets and expenditure incurred on purchasing or constructing them is called capital expenditure. Typical examples of tangible assets include land, land improvements, buildings, machinery, office equipment, furniture and fixtures, etc.
Buildings are intangible assets because (a) they have physical existence, (b) they have a useful life longer than one year, say 15 years, and (c) they are operating in nature.
Copyrights, on the other hand, are not tangible assets but are intangible assets because even though they are operating in nature and they have useful life longer than one year, they do not have physical existence.
Long-term investments are not tangible assets because even though they are non-current they do not have any physical existence, and/or they are not operating in nature.
Accounting for Tangible Assets: Cost Components
Amount expended on acquiring or constructing tangible assets is recorded as an asset on balance sheet which is periodically charged to income statement. The process through which the cost of a tangible asset is written off over its useful life is called depreciation.
Popular depreciation methods include straight-line method, declining balance method, modified accelerated cost recovery system (MACRS) method, etc.'Depreciation is recorded by debiting the depreciation and crediting the accumulated depreciation account, which is a contra-account to the cost account.
The carrying value of a tangible asset equals the difference between cost and the closing balance of the accumulated depreciation.
Some tangible assets such as land have unlimited useful life and hence they are not depreciated. However, all assets are tested for impairment when there are indications that their carrying value might be higher than their fair value (recoverable value in case of IFRS).
The amount at which the asset is recognized includes all such costs which are necessary to bring the asset to its intended use. Typical costs which form part of the cost of a tangible asset include invoice amount, any irrecoverable taxes, transportation costs, insurance in transit, installation costs, testing costs (minus any proceeds from test run production), etc.
Cost of Land
Land is a tangible asset with unlimited useful life, hence it is not depreciated but is tested for impairment.
Cost of land includes:
- Purchase price
- Transaction costs such as commissions, legal fees, etc.
- Cost of removal of existing structures
- Amounts paid to third parties such as government in relation to the development of the area such as construction of roads, development of electricity, gas, water, sewerage systems, etc. only if the third party or the government is responsible for maintenance of such systems.
Cost of land doesn’t include costs incurred in development of internal infrastructure such as fences, pavements, etc. whose maintenance is responsibility of the land-owner.
Land improvements represent items which improve the usability of land such as landscaping, pavements, fencing, etc. Cost of land improvements include costs incurred on items whose maintenance is responsibility of the land-owner.
Because land improvements must be maintained by the land-owner, they must be redone after a period of time and hence they have limited useful life, hence they are depreciated.
Buildings are structures erected on land. Un land, they are depreciable and when land and buildings are acquired together, the basket purchase cost must be allocated to land and building their fair values.
Cost of acquired building include purchase price, transaction fees such as commissions, legal fees, etc. plus any costs incurred on adjustments and alterations necessary to put the building to its intended use.
Cost of self-constructed buildings include:
- Cost incurred to obtain the necessary approval to commence construction such as municipal fees, regulatory clearance fees, etc.
- Costs incurred on designing the building i.e. architect’s fee, consultant’s fee, etc.
- Cost incurred on construction including materials, labor and overheads.
- Capitalized interest
Equipment, Machinery, etc
Cost of equipment, machinery, furniture, etc. include purchase price, irrecoverable taxes, transaction costs, transportation costs, insurance in transit, installation and testing costs, etc.
by Obaidullah Jan, ACA, CFA and last modified on Jul 3, 2018
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Net Tangible Assets
Net Tangible Assets (NTA) means the total assets of a business, less any intangible asset such as goodwill, patents, and trademarks, less all liabilities. Your NTA will determine your maximum revenue (MR) for the forthcoming year.
NTA = [Entity’s Assets] – [Entity’s Liabilities] – [Entity’s Intangible Assets] — [Entity's Disallowed Assets]
You must own your assets both legally and beneficially (e.g. real estate, cash, collectible investments) and they cannot include assets held on trust for another person or corporation.
Assets do not include the following:
- furniture (personal)
- investments or shares in companies that are not publicly listed companies
- investments values using equity accounting methodology where included in special purpose financial statements
- units in trusts that are not publicly listed
- trade or barter dollars and any equivalent scheme
- assets assured to another licensed entity through a Deed of Covenant and Assurance.
- boats, ships, jet skis, planes, helicopters, race horses and racing cars
- collectors items (e.g. paintings, stamps, coins)
- contingent assets
- unvested superannuation benefits, and
- life or income protection insurance policy benefits.
All your liabilities must be taken into account. This includes any debts or obligations you must pay or settle within a certain period of time or pay on demand (e.g. amounts of related entity loans, shares in companies not publicly listed).
What are intangible assets?
Intangible assets include, but are not limited to:
- Right of Indemnity
- Intellectual Property
- Formation Expenses
- Value of Trademark
- Borrowing Expenses, and
- Deferred tax assets.
Related entity loans
Accountants must indicate if related entity loan assets have been included, and must verify their collectability. You cannot include:
- shares in a company which is not a publicly listed. Only shares in publicly listed companies can be counted towards NTA. This also includes units in an unlisted trust
- related entity asset loans which are not independently verified as collectible
- investments valued using the equity accounting methodology.
NTA and financial category
An accountant completing the MFR Report may restrict the licensee's maximum revenue to the category required by stating the NTA as only the amount required for the level of maximum revenue being sought.
Example: Licensee has an NTA of $250,000 which would provide for a maximum revenue of more than $5.6 million. If the licensee only wants an MR of $3,000,000, the accountant can restrict the MR to $3,000,000 by stating 'at least' $156,000 NTA in the MFR Report.
All licensees are subject to conditions:
- Your NTA is not to decrease by more than 30 per cent (or 20 per cent if you are a category 4-7 licensee) from the amount previously stated to the QBCC. This includes a decrease in assets assured by way of a Deed of Covenant and Assurance
- You must send an updated MFR Report (PDF) within 30 days of the NTA decrease
- You must have an NTA in your own right of at least $0.
You must meet the NTA requirement as follows:
|Business structure||NTA from:|
NOTE : Evidence of a formal business Partnership Agreement (PDF) must be provided where a Deed is provided by the partner of the applicant. You cannot include the assets of the partnership but may include your personal EQUITY (OR LOSS) in the partnership in determining your NTA.Example — If the partnership equity is $10,000 and you have a 40 per cent share within the partnership, equity of $4,000 may be included as a personal asset in your NTA.
|Trust||For an individual:|
For a company :
NOTE : Assets and liabilities held in the Trust cannot be taken into consideration in determining NTA and cannot be assured to the applicant through the use of a Deed. However, pursuant to Section 16 of the Regulation, the MFR framework must be applied to the financial information of the trust and any QBCC Net Tangible Asset deficiency is a liability in calculating the Net Tangible Asset position of the trustee.
|Subsidiary company within a consolidated group subject to ASIC Class Order (98/1418)||A Company subject to an ASIC Class Order (98/1418) — Deed of Cross Guarantee, may meet the NTA requirement from either:|
The applicant or licensee party to the Deed of Cross Guarantee will be required to provide evidence that the Deed is in place when submitting the MFR Report and signed financial statements.
|Parent company within a consolidated group||A parent company of a consolidated group subject to ASIC’s audited requirements, may meet the NTA requirement from either:|
The applicant or Licensee party to the Deed of Cross Guarantee will be required to provide evidence that the Deed is in place when submitting the MFR Report and signed financial statements.
Tangible vs. Intangible Assets
All businesses have assets. Assets can be broken down into two categories: tangible and intangible. Understand the difference between tangible vs. intangible assets to keep your accounting books and financial statements accurate.
Tangible vs. intangible assets
Both tangible and intangible assets add value to your business. But, tangible assets are physical while intangible assets are non-physical property.
This difference between tangible and intangible assets affects how you create your small business balance sheet and journal entries.
Read on to learn the differences between tangible assets vs. intangible assets.
Tangible assets are physical items that add value to your business. Tangible assets include cash, land, equipment, vehicles, and inventory.
Tangible assets are depreciated. Depreciation is the process of allocating a tangible asset’s cost over the course of its useful life. An asset’s useful life is the duration it adds value to your business. Generally, assets lose value after a year.
Tangible assets can be further broken down into two categories: current and fixed.
Current assets are liquid items that can easily be converted into cash within one year. These assets are more liquid than fixed assets. Cash, inventory, and accounts receivable are examples of current assets.
Fixed assets, on the other hand, are long-term assets that cannot be converted into cash within one year. Buildings, land, and equipment are examples of fixed assets.
Un tangible assets, intangibles are non-physical items that add value to your business. Patents, trademarks, copyrights, and licenses are examples of intangible assets.
Intangible assets are not easy to convert into cash. They are less liquid than fixed assets.
The cost of intangible assets is difficult to determine because they are not physical items. For example, there isn’t a price tag on the value of your company’s logo.
Intangible assets are amortized. Amortization is the process of allocating an intangible asset’s cost over the course of its useful life.
List of tangible assets vs. intangible assets
Here is a more detailed look at tangible and intangible assets you might have at your business.
Tangible vs. intangible assets on the balance sheet
A business balance sheet is a financial statement that lists your company’s assets, liabilities, and equity. Assets are broken up and clearly listed on the balance sheet.
Record both tangible and intangible assets on your balance sheet, with tangible assets being first. Assets are listed from most to least liquid.
You must break down tangible assets when listing your property on this financial statement. List your current assets first, followed by your fixed assets. Then, list your intangible assets.
Generally, you can only record acquired intangible assets on your balance sheet, meaning assets you obtain from another business. You will not include intangible assets that your company internally generated (e.g., a patent you purchased).
Tangible assets and intangible assets in accounting
You must know how to record tangible and intangible assets in accounting. Keep in mind that assets are increased by debits and decreased by credits.
Let’s say you spend $5,000 on inventory, a tangible asset. You will need to debit your inventory account (because it is increasing) and credit your cash account (because it is decreasing). The same would be true if you spent $5,000 on a patent, an intangible asset.
Depreciation and amortization
Depreciation and amortization paint a more accurate picture of your company’s finances. These processes spread out a big expense over the course of several years.
Accounting for intangible assets and tangible assets gets tricky when you factor in depreciation and amortization for long-term assets. Again, you depreciate tangible assets and amortize intangible assets.
List depreciation and amortization expenses on your income statement.
assets, depreciation and amortization expenses are increased by debits and decreased by credits.
The IRS lists two methods of depreciation you can use, which are straight-line and accelerated depreciation. Straight-line depreciation spreads out an asset’s cost evenly (by dividing the total cost by its useful life) while accelerated depreciation deducts a higher percentage in the first few years, then less later on.
To create journal entries for depreciation expenses, you must debit your depreciation expense account and credit your accumulated depreciation account.
Let’s say you purchase a vehicle for $20,000 with a useful life of five years. Using straight-line depreciation, divide the cost by the useful life. This gives you an annual depreciation expense of $4,000. Your journal entry would look this:
|3/2/2018||Depreciation ExpenseAccumulated Depreciation||Vehicle||4,000||4,000|
Amortization works similarly to depreciation. You can find an amortization expense by dividing an intangible asset’s cost by its useful life.
Then, create journal entries that show how much your annual amortization expense is. Debit your amortization expense account and credit the intangible asset account.
Let’s say you purchase a patent with a useful life of 14 years for $14,000. After dividing the cost by the lifespan ($14,000 / 14), your annual amortization expense is $1,000. Your journal entry would look this:
|3/2/2018||Amortization ExpensePatent||Patent on ABC||1,000||1,000|
Tangible vs. intangible assets and taxes
Tangible and intangible assets can benefit your business come tax time, too. You can reduce your tax liability through depreciation and amortization. Depreciation and amortization are tax deductions you can claim with the IRS.
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Net Tangible Assets | Calculate Net Tangible Assets Per Share
Net Tangible Assets is the resultant value derived as the company’s total assets less all intangible assets patents, goodwill, and trademarks minus all the liabilities and stock or in other words net intangible asset is the total of all the physical assets plant, machinery, land, buildings, inventories, all-cash instruments, etc.
Net tangible assets is an accounting term, also alternatively known as net asset value or book value. It can be calculated by taking the total assets of a business and subtracting any intangible assets goodwill, patents or trademarks, par value of preferred stocks and also remove all liabilities to arrive at the figure.
Net Tangible Assets Formula
Net Tangible Assets Formula = Total Assets – Intangible Assets – Total Liabilities
- Total Assets = Total assets are the sum total of the asset side of the balance sheet. It includes all current assets, long-term tangible assets, as well as intangible assets and goodwill.
- Intangible Assets = These assets are those which we can’t touch or feel, for example, goodwill, trademark, copyrights, or patents. Please note that most balance sheet reports goodwill separately from intangible assets. In our Net tangible asset formula, do not forget to take the sum total of both.
- Total Liabilities = These include current liabilities, long-term debt, and other long-term liabilities.
Net Tangible Assets Example
Suppose Company A has total assets worth $1.5 million on its books, has total liabilities worth$200 million and intangible assets worth $500 million, then after subtracting both of them from total assets, net assets would come to $800 million.
Starbucks Net Tangible Assets Calculation
Now that we calculate NTA of Starbucks.
source: Starbucks SEC Filings
- The Total Assets (2017) = $14,365.6
- Total Intangible Assets (2017) = $516.3 + $1539.2 = $1980.6
- Total Liabilities (2017) = $8,908.6
- NTA Formula (2017) = Total Assets (2017) – Total Intangible Assets (2017) – Total Liabilities (2017)
- = $14,365.6 – $1980.6 – $8,908.6 = $3,476.4
- The Total Assets (2016) = $14,312.5
- Total Intangible Assets (2016) = $441.4 + $1,719.6 = $2161.0
- Total Liabilities (2016) = $8,421.8
- NTA Formula (2016) = Total Assets (2016) – Total Intangible Assets (2016) – Total Liabilities (2016)
- = $14,365.6 – $1980.6 – $8,908.6 = $3,729.7
Significance and Use of NTA
This measure is considered very useful in the analysis of a company’s assets bit their level relevance might be different for any industry one might be dealing with. The relevance of NTA is largely dependent on how important intangible assets are for a specific industry since they are taken away while calculating this measure.
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- In the case of Oil & Gas companies or car manufacturers, NTAs are very high. They can secure debt financing relatively easily by pledging their tangible assets.
- In technology companies, however, intangible assets are pretty large. This results in a lower amount of NTAs.
Net Tangible Assets Per Share
This measure is used in place of NTA for a useful comparison of companies operating within a specific industry. This is because different industries tend to have widely varying ratios of tangible assets and intangible assets, and hence the relevance of this measure differs.
Net tangible assets per share are calculated by dividing the NTA figure by the total number of shares outstanding for a company.
- Net Tangible Assets per share formula = NTA / Total number of shares
Example of Net Tangible Assets Per Share
In the example, we discussed earlier, if Company A has NTA worth $800 million and has 200 million outstanding shares, NTA per share would work out to $4.00 per share.
This has been a guide to what is Net Tangible Assets, its formula, example, and calculations. Here we also discuss Net Tangible Assets Per Share and why it is important? You may also go through the recommended articles on basic accounting –
Tangible vs Intangible | Top 8 Best Differences (With Infographics)
Tangible means anything which we can touch, feel and see. So any tangible assets are assets that have physical existence and its physical property it can be touched. Tangible assets mostly associated with fixed assets.
Examples of tangible assets include Land, Building, Machinery, Equipment, Cash, Stock, Plant, any property that has long term physical existence or it is purchased for use of business operations and not for sale, Vehicles, etc.
An Intangible Asset is assets that do not have a physical existence. It is not possible to see, touch or feel these assets. Intangible Assets useful life is usually greater than one year.
Example of Intangible Assets includes Goodwill, Patent, Brand, Copyright, Trademarks, and Permits Patent, Brand, Copyright, Trademarks, and Permits, etc.
Assets are divided into 3 main categories as per below
- Let discuss the asset category of Physical existence in detail.
In this category, assets are divided on basis of their existence. Assets in this category further divided into two subcategories.
Tangible assets are used as collateral for loans since such assets have a long term valuation that is valuable to a lender. Tangible assets are purchased at a measurable price, it is much easier to value Tangible assets as compared to Intangible Assets.
Tangible assets required maintenance to support their values and production capabilities. Tangible assets easily sold to raise cash in emergencies.
High-risk industries such as banking and finance use their tangible assets to reassure investors as this asset can always be liquidated and converted into cash.
Intangible Assets further divided into two categories (a) Indefinite (b) Definite. Any Intangible asset which stays longer with the company is called Indefinite Intangible assets.
For example Companies brand name which stays as long as it continues operation. Any Intangible asset which has limited life is called as Definite Intangible assets.
For example legal agreement to operate under another Company’s patent with no plan of extending the agreement.
Intangible assets cannot be used as collateral to raise the loan. The automobile industry has several Intangible assets which include patents, research, and development, brand name etc.
Its just example which created by Taking XYZ as a person here and he is having a business of car manufacturing so for him tangible assets are machinery, Building, all types of equipment used for the production of car, inventory and etc.
Now let say XYZ person need small part of car for production car so he contacted to person who is having small part production business and he agrees that he will supply small part to XYZ person manufacturing unit but value of that contract is not clear at this moment so this contract is intangible asset for XYZ person at this moment because its value yet not fix and its just and legal agreement between two parties which not physical in nature.
Head to Head Comparison between Tangible vs Intangible (Infographics)
Below is the top 8 difference between Tangible vs Intangible
Key Differences between Tangible vs Intangible
Let us discuss some of the major differences between Tangible vs Intangible.
- An asset purchased or acquired by a company which is had monetary value and is physically present is called tangible assets. An Asset which doesn’t have materials existence and has a useful life and economic value is called as Intangible assets.
- The reduction in value of tangible assets is called depreciation and in Intangible assets is called amortization.
- Due to the physical presence of tangible assets, it’s easy to convert them into cash In case of emergencies, it is a little bit difficult to sell Intangible assets.
- Tangible Assets are accepted by the lender as collateral while granting a loan to the company, Intangible assets cannot be used as collateral for the loan.
- The existence of tangible assets is essential for the functioning of a company whereas non-existence of Intangible assets will not have that much impact on the company.
- The value of tangible assets adds to the current market value but in the case of intangible assets, the value gets added to the potential revenue and worth.
Tangible vs Intangible Comparison Table
Let’s look at the top 8 Comparison between Tangible vs Intangible
|The Basis Of Comparison Between Tangible vs Intangible||Tangible Assets||Intangible Assets|
|Form||Assets have a physical existence.||Assets do not have physical existence.|
|Liquidation||Generally easier to sell in the market due to their physical presence.||Not that much easier to sell in the market due to non-existence.|
|Reduction in Value||Assets are depreciated.||Assets are amortized.|
|Risk||Tangible assets can be destroyed by accident, fire, hurricane or Other disasters, due to such risk it requires insurance protection.||Intangible assets cannot be destroyed by fire or other such disasters but by carelessness or business decision.|
|Collateral||Assets are used as collateral for a loan.||Assets cannot be used as collateral for a loan.|
|Cost||Easy to determine or evaluate the cost of Tangible Assets.||Much difficult to determine the cost of Intangible Assets.|
|Examples||Vehicles, Building, machinery, Plant, etc.||Logo, Patent, Copyright, etc.|
Conclusion – Tangible vs Intangible
Both tangible vs intangible assets are recorded by the company in their books of accounts. Tangible assets are very important for any company for a smooth running of their operations, Intangible assets help in creating future worth of a company.
In order to be a successful company needs to have a good combination of tangible vs intangible assets. When comparing the two, both tangible vs intangible assets have their pros and cons, but they have their impact on the functioning of the organization.
Intangible assets provide a company with its identity through its strong brand name.
Now days some survey suggests that the value of companies is now mostly generated by intangible assets it’s because of effective usage of knowledge and therefore knowledge management. In this era of knowledge or information economy, management of intangible assets is a very important competitive advantage and sustainable performance.
How to Use Net Tangible Assets to Analyze Stocks
Part of balance sheet analysis is understanding theintricacies behind each asset and what they represent. Net tangible assets canbe a very useful metric for evaluating a company’s future profitability,especially in capital intensiveindustries.
In this blog post, I’ll explain the basics behind net tangibleassets and include a few easy and practical metrics for it.
Then we’ll discuss a bit of the history behind the metricand how this applies to how investors should consider valuing assets these—amidsttoday’s economic environment that is increasinglydepending on the internet.
To understand net tangible assets, you might understand itstwo parts: the net assets part and the tangible assets part.
Net assets is simple. It’s just the term “net worth”.To calculate net assets, you simply take total assets and subtract total liabilities.In a balance sheet, net assets is the same as shareholder’s equity or bookvalue.
The “tangible” definition of an asset is needed because notall assets are created equally. Nor is every asset valued equally.
When you really break down what an asset is, it’s somethingthat can be bought or sold and, most of the time, generates an income stream.
A company could have many different types of assets that contribute to its cash flow. A clothing company that sells jeans could have factory equipment that produces the jeans, and that factory equipment would be considered an asset.
However, the clothing company could also have ownership rights to a popular brand, and the brand itself would also be considered an asset and arguably have more to do with the company’s profitability than the equipment itself.
In this simple example, the factory equipment would fall onthe company’s balance sheet as a tangible asset, and the brand would be reflectedas an intangible asset.
Now, there’s lots of intricacies behind intangible assets,when and how they are represented on a balance sheet, and ways to value them.That will not be the point of this blog post. Just understand that net tangibleassets look at just the tangible assets a company has—which reflect real assetsthat we can touch and accurately quantify such as factory equipment and cash.
Net Tangible Assets Example: AMZN Balance Sheet
Let’s calculate the net tangible assets for Amazon ($AMZN) fromits 2019 annual report. As I do with most of my examples, I’m going to take ascreenshot from the Consolidated Balance Sheet for AMZN that can be found at sec.gov.
All of the company’s current assets are tangible, so theywill be included in our Net Tangible Assets calculation.
mentioned earlier, Property and equipment is an obvioustangible asset and will also be included. Goodwill is an intangible asset andso we won’t add it.
For the “other assets” row, we have to read the notes in the 10-k to determine whether these assets should be considered tangible or not.
From page 46, the company writes that “other assets” are primarily related to acquired intangible assets, so these will also not be included in Net Tangible Assets.
So, for 2018, Amazon’s Tangible Assets =
75,101 (Total Current Assets) + 61,797 (Property and equipment)= 136,898.
Now let’s subtract liabilities to arrive at Net Tangible Assets.
To calculate Total liabilities for AMZN in 2018, which isn’texplicitly posted in this balance sheet, I’m going to take Total Assets minusShareholder’s Equity. So, Total liabilities = 162,648 – 43,549 = 119,099.
Net Tangible Assets = 136,898 (Tangible Assets) – 119,099(Total Liabilities)
Net Tangible Assets = $ 17,799 (in millions).
Practical Metrics to Use with Net Tangible Assets
Now that we have Amazon’s net tangible assets, we can use ametric Net Tangible Assets per share, or NTA/share. To calculate NTA/share,simply take the Net Tangible Assets and divide by shares outstanding.
AMZN 2018 NTA/share = $17,799 / 500
AMZN 2018 NTA/share = $35.60
Note: to find Amazon’s shares outstanding, I simply took the diluted shares number from the line item “Weighted-average shares used in computation of earnings per share” in the Income Statement.
Now that we have the NTA/share figure, we can use this figureto either compare the stock with others in its industry, or calculate amodified P/B ratio from it.
The P/B or Price to Book ratio is a simple balance sheetmetric that is commonly used to calculate how undervalued (or overvalued) astock is priced compared to the assets and equity on its balance sheet. I’drecommend reading through a P/Bratio guide first if you aren’t familiar with this metric.
In this version of the P/B ratio (or Price to Tangible BookValue Ratio), we’re going to simply replace the BVPS (book value per share)with NTA/share figure. For AMZN, that comes out to:
Tangible BVPS = [Share price] divided by [NTA/share]
Tangible BVPS = $1827.55 / $35.60 = 51.34.
This modified P/B ratio can be used in the same ways that astandard P/B ratio would be used, to compare stocks in the same industry or tocompare a stock to its historical P/B average. You can also use it on anabsolute rather than relative basis too if that’s what you to do.
How Balance Sheets Were Historically Constructed vs. the Business Models of Today
In the past, there was a much heavier focus on companies with high Net Tangible Assets. Especially before the internet, there were a lot more capital intensive businesses that needed expensive assets machinery and equipment to make profits.
Today, the industrial economy has shifted to more of an information and idea economy—and high net tangible assets aren’t always necessary depending on the business model.
However, as investors who are scrolling through balancesheets, it’s imperative that we know how to calculate net tangible assets and determinewhether we want to prioritize stocks with a high percentage of tangiblevs intangible assets, or not. There’s heavy debates behind which of the twotypes of assets, tangible or intangible, are better for picking stronger stocks.
But what’s mostly ly—is that there will not be any one solution for every business, as every business is different.
However, by intelligently considering each business and industry and coloring your balance sheet analysis this lens, you have a much better chance of being a better stock analyst whether a company has high net tangible assets or not.