What is asset value?
Asset value is a number that tells you what a company is worth. It’s the value of everything the company owns (called assets) minus everything it owes others (called liabilities).
Assets are things the company has that are worth money. They could be stuff you can touch, like buildings, machines, or products to sell. Or assets that aren’t physical objects, like trademarks or money others owe the company. If the company sold all these assets, it would get cash.
Liabilities are bills the company needs to pay. Loans it took out. Wages and benefits it owes workers. Taxes it needs to pay the government. Products it needs to deliver to customers.
So asset value is what would be left over in cash if the company sold off everything it owned and paid off everyone it owed money to. Whatever’s left is the company’s asset value.
An example of asset value
Pretend Hot Pie Co. is a small bakery. It owns an oven that cost $10,000, has $5,000 in its bank account, and people owe Hot Pie Co. $2,000 for pies they already bought. So Hot Pie’s total assets are:
- Oven: $10,000
- Bank account: $5,000
- Money owed: $2,000
- Total assets: $17,000
But Hot Pie also has bills to pay. It owes $4,000 on a loan used to buy that oven. It also needs to pay workers $3,000 for work they already did. So Hot Pie’s total liabilities are:
- Loan: $4,000
- Wages owed: $3,000
- Total liabilities: $7,000
To get Hot Pie’s asset value, take the assets ($17,000) and subtract the liabilities ($7,000):
- Asset value = Assets – Liabilities
- Asset value = $17,000 – $7,000 = $10,000
That means if Hot Pie sold everything, paid everyone it owed, and closed up shop today, it would have $10,000 in cash left over. That $10,000 is Hot Pie’s asset value.
Asset value per share
Some companies have pieces of ownership called shares. Each share is like a tiny slice of the company. If a company has 1,000 shares, and you own 100 shares, you own 10% of that company.
For companies with shares, we often talk about asset value “per share”. It tells you the asset value for each little piece of the company.
To get asset value per share, take the total asset value and divide it by the number of shares:
- Asset value per share = Asset value / Number of shares
Let’s say Hot Pie Co. has 1,000 shares. We know the total asset value is $10,000. So the asset value per share is:
- $10,000 asset value / 1,000 shares = $10 per share
Each little slice of ownership in Hot Pie (each share) has $10 of the total $10,000 asset value attached to it.
What if a company has no shares?
Not all companies have shares. Smaller companies often don’t. For them, we just talk about total asset value, not asset value per share.
But bigger companies whose shares trade on the stock market always have shares. For them, asset value per share is more useful to know than total asset value.
What asset value means
Asset value gives you an idea of what a company is worth based on what it owns versus what it owes. It’s the cash that would be left if the company closed down immediately.
A high asset value means the company owns a lot of valuable stuff compared to what it owes. It’s in good shape. A low asset value means it doesn’t own much compared to what it owes.
An asset value less than zero means the company owes more than it owns. It would still owe money even if it sold everything! That’s a bad sign the company is struggling.
Limitations of asset value
But asset value can be misleading. It’s not a complete picture of a company’s value. Here’s why:
- Going concern value. Asset value assumes the company shuts down today. But companies are usually worth more if they stay in business. Hot Pie might only have $10,000 in asset value if it closed immediately. But as a popular ongoing bakery, it’s probably worth more than that $10,000.
- Hard to value assets. Some assets are easy to put a dollar value on, like cash in the bank. But others are hard, like the secret recipe Hot Pie uses. That recipe helps Hot Pie make money, so it’s valuable. But how to put a dollar amount on it? Asset value often ignores assets like that.
- Accounting quirks. Sometimes accounting rules say you have to value an asset at the price you bought it for, even if it’s worth more now. So the asset value calculation might use the $10,000 Hot Pie originally paid for that oven, even if it’s now a vintage oven worth $15,000.
