Net tangible assets can be a very useful metric for evaluating a company’s future profitability, especially in capital intensive industries.
In this blog post, I’ll explain the basics behind net tangible assets and include a few easy and practical metrics for it. We’ll break it up into these simple parts [Click to Skip Ahead]:
- What is the Net Tangible Assets Formula?
- Net tangible assets example: Amazon ($AMZN)
- Practical Metrics to Use With Net Tangible Assets
- Net Tangible Asset Meaning in Today’s Stock Market
To understand net tangible assets, you might understand its two parts: the net assets part and the tangible assets part.
What is the Net Tangible Assets Formula?
Net assets is simple. It’s just like the term “net worth”, usually also called “book value” or “shareholders’ equity” on the balance sheet.
The “tangible” definition of an asset is needed because not all assets are created equally. Nor is every asset valued equally.
Examples of Tangible Assets include:
- Equipment
- Real Estate
- Long Term Investments
- Inventory
- Cash
So, the Net Tangible Assets Formula:
= Current Assets plus Tangible Long Term Assets minus Total Liabilities.
Tangible long term assets usually includes Plant, Property, and Equipment and Other Assets, and excludes Goodwill and Intangible Assets.
Net Tangible Assets Example: AMZN Balance Sheet
Let’s calculate the net tangible assets for Amazon ($AMZN) from its 2019 annual report. As I do with most of my examples, I’m going to take a screenshot from the Consolidated Balance Sheet for AMZN that can be found at sec.gov.
All of the company’s current assets are tangible, so they will be included in our Net Tangible Assets calculation.
Like mentioned earlier, Property and equipment is an obvious tangible asset and will also be included. Goodwill is an intangible asset, so 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’t explicitly posted in this balance sheet, I’m going to take Total Assets minus Shareholder’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 a metric like 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 figure to either compare the stock with others in its industry, or calculate a modified P/B ratio from it.
The P/B, or Price to Book, ratio is a simple balance sheet metric that is commonly used to calculate how undervalued (or overvalued) a stock is priced compared to the assets and equity on its balance sheet. I’d recommend reading through a P/B ratio guide first if you aren’t familiar with this metric.
In this version of the P/B ratio (or Price to Tangible Book Value 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 a standard P/B ratio would be used, to compare stocks in the same industry or to compare a stock to its historical P/B average. You can also use it on an absolute rather than relative basis too if that’s what you like to do.
Net Tangible Asset Meaning in Today’s Stock Market
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 like 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 balance sheets, it’s imperative that we know how to calculate net tangible assets and determine whether we want to prioritize stocks with a high percentage of tangible vs intangible assets, or not. There are heavy debates behind which of the two types of assets, tangible or intangible, are better for picking stronger stocks.
But what’s mostly likely—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 based on this lens, you have a much better chance of being a better stock analyst whether a company has high net tangible assets or not.
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