What is tangible net worth (TNW)?

Tangible net worth removes assets that have little or no value in a liquidation, most commonly goodwill, trademarks, patents and other intangible assets, from shareholders' equity. Many lenders also deduct amounts due from officers, shareholders or affiliates, since those receivables are often not collectible when a business is under stress.

Lenders use tangible net worth as a measure of the equity cushion that protects creditors. Minimum tangible net worth covenants are common in commercial loan agreements, and the ratio of total liabilities to tangible net worth is a standard leverage measure. Some lenders add subordinated debt to equity to calculate effective tangible net worth, since that debt ranks behind the bank.

The main pitfall is inconsistency between the analyst's calculation and the covenant definition in the loan agreement, which may include or exclude specific items. Companies that have grown through acquisitions can show negative tangible net worth even when profitable, so the measure should be read alongside cash flow. Distributions, losses and treasury stock purchases all reduce tangible net worth and can trigger covenant breaches.