# Debt to Tangible Net Worth Ratio

Debt to tangible net worth ratio is the ratio measure the lender’s protection if the company when bankrupt. It is the comparison of a company’s total liabilities to owner equity (shareholder equity) exclude any intangible asset.

The lender wants to access the company’s assets which will be sold to settle the debt in case of insolvency. Intangible assets are excluded from the calculation as most of them are not worth anything when they file for bankruptcy. To eliminate the intangible assets will measure the company’s real ability to pay off the debt.

## Debt to Tangible Net Worth Formula

 Debt to Tangible Net Worth = Total Liabilities / (Shareholders’ Equity – Intangible Asset)

## Example

For example, base on company A’s balance sheet on 31 Dec 202X, shareholder equity equal to \$ 100,000, and total liabilities are \$ 60,000. Moreover, the company-owned some intangible asset such as:

Description Amount
Goodwill 10,000
Patent 8,000
Software 12,000

Debt to tangible net worth = 60,000 / (100,000-10,000-8,000-12,000) = 85%

It means that if the company when bankrupt, there will be 1 dollar worth of tangible assets for every 85 cents of debt.

### Easy to calculate

The ratio is simple to calculate without any complicated skill. The required data is available in the balance sheet. We do not need to extract from the system or any other software. Accountants just take the figure from the balance sheet and make the calculation.

### Easy to compare between industry

It is the universal formula, so it enables the lender to compare between the company and lend the money to a low-risk company. Due to limited funds, lenders will need to make precise decisions, so they will prefer low-risk companies.