What is net worth?

4 min read

I always thought I’d have a giant boat. A sports car, sure. Maybe a swimming pool. But mainly, a giant boat. Now, that all looks less likely. I’d settle for a dishwasher, these days.

Sobering thoughts. But let me explain.

Last night I read that Jay-Z has a net worth of $2.5 billion. Yes: Two-point-five-billion big ones. Enough to make you fall into an existential crisis, right? But before the self-loathing, let’s take a breath. What is net worth? Why is it important? And is it worth getting sad about?

What is net worth?

So, let’s start simple and get gradually deeper into the topic. First up: What is net worth?

Net worth is the difference between an entity’s assets and liabilities. That means how much money is actually left once a company or person has paid off all their financial obligations.

Think of it this way: If Jay-Z’s getting $2 billion in royalties each year but he owes $2.1 billion in rent, then his net worth is negative. Negative net worth means you lack solvency. This will scare off potential investors, create legal or regulatory problems like breaching of trading regulations, or simply bring you the humiliation of perceived instability.

Now, if Jay-Z earns $2 billion in royalties but owes $1.9 billion in rent, then he only has a net worth of $0.1 billion. Not negative, but not quite as impressive. Though still 100 million more dollars than me.

How do you calculate net worth?

We’ve just touched on it, but let’s simplify further. Calculating net worth is a straightforward formula that boils down to: Net worth = Assets – Liabilities.

Assets are everything the company owns and has rights to. They can be physical things you can touch, like machinery or real estate, or they can be intangible goodies, like intellectual property, patents and trademarks.

On the flip side, liabilities are the financial commitments and debts the company owes to others. That might be loans or amounts owed to suppliers.

So, if Jay-Z’s properties, cash and investment amounted to $5 billion (total assets) but he had $2.5 billion of payable accounts and loans (total liabilities), he would have a net worth of…

$2.5 billion. See? We’ve come full circle.

What is net worth for?

Now that we understand net worth, let’s discuss its importance.

Net worth—also known as shareholder equity—is a key reference for potential investors. This is because it demonstrates whether an entity can stay financially strong amidst rises in interest rates or inflation.

Internally, net worth is also key for assessing how much risk you can take in future projects. You’ll often see boards puzzling over the ratio of net worth to debt before making any big financial decisions.

And, finally, net worth is a great way to impress your friends at a bar. Ideally, your own. But someone else’s is good, too.

How to increase your net worth?

In short—strengthen your financial foundation. Boost profits, cut unnecessary expenses, optimize asset management and manage your capital structure. As your net worth-to-debt ratio increases, you’ll look a lot stronger to potential investors.

If you want to grow your net worth sustainably, find ways to drive consistent profit growth over time. That means finding the right balance between your assets and external financing. If you’re a business owner, you may want to try issuing new shares or attracting investment. Also consider reinvesting profits back into your business to secure long-term growth.

What is the statement of changes in equity?

The statement of changes in equity (SCE) is a financial report that shows how your net worth changes over a specific period. It tracks fluctuations in recognized income and expenses, as well as transactions with shareholders that affect equity. The SCE also lists key activities such as paying dividends, issuing shares or other transactions.

It’s worth being informed about the SCE. With so many details, it’s a report that simplifies the process and helps you understand the decisions impacting your capital structure.

All sounds very official, doesn’t it? But when you boil it down… it’s not too tricky. And I think that might be the solution to my problem.

Why are these numbers so important?

I’m no longer having my existential crisis, and I’ll tell you why. Of course, SCEs are great. It’s great to have a snapshot of your financial health. To be empowered in making financial decisions. Net worth is a helpful flat value.

But I’m not a flat value. I’m proud of my three dimensions. So, next time you bring me up in a bar with your friends, try talking about my net character. Or my net approachability and helpfulness. Let me worry about my net boat-buying ability.

Anyway, some good news. I’ve cancelled my Spotify membership. Guess whose net worth just increased by $11.99 this month?