5. Analysis of the organization’s equity and net assets

Net assets

Net assets (English Net Assets) – reflect the real value of the enterprise’s property. Net assets are calculated by joint stock companies, limited liability companies, state-owned enterprises and supervisory authorities. The change in net assets allows you to assess the financial condition of the enterprise, solvency and level of bankruptcy risk. The methodology for assessing net assets is regulated by legislation and serves as a tool for diagnosing the risk of bankruptcy of companies.

NA analysis

When calculating the NAV, the result may be as follows:

1. If, after applying the formula for calculating net assets on the balance sheet, a negative value is obtained, then the organization’s debts to third parties exceed the company’s profitability. In other words, the result of the company's activities will be unprofitable. The company is dependent on creditors.
2. A positive net asset value (calculation formula for the 2018 balance sheet) means that the company can easily make payments on its debts with counterparties and it has its own funds.
3. If the calculation of net assets on the balance sheet for an LLC turns out to be zero, this means that the organization operates without profit.

The worst situation occurs for legal entities when the NAV value is negative, since in this case the probability of their bankruptcy is quite high.

It should always be monitored that the NAV is not less than the required amount of the capital, otherwise the organization is subject to liquidation.

Previously, we wrote about how to increase the NA if the balance sheet structure is unsatisfactory.

But these are not all the ways to increase its size, there are others:

1. An additional issue of charter capital is being carried out by the founders of the company (line 1310 of the balance sheet)
2. The founders make a contribution to increase the reserve capital (line 1360 of the balance sheet).
3. You can write off overdue debts from creditors, but this operation will increase the amount of income tax.
4. When transferring property free of charge by company shareholders or other persons. Future income will increase. This will increase the NAV. To ensure that the profit tax does not increase as a result of this operation, it is necessary that this founder owns at least 50% of the charter capital or shares of the company.

All these methods are undoubtedly good, but you need to understand that this is just an artificial increase in the number of assets and the well-being of the organization will not improve from this. A negative NA value is allowed if the company was created recently and did not have time to earn a sufficient NA.

The calculation of net assets on the balance sheet for an LLC, or in other words, their value is not indicated in the balance sheet; it should be prepared in a separate form. The legislator does not provide any explanations about the form of this form.

The organization is forced to independently create the necessary form for calculating the net asset value and register its form in its accounting policies.

You can use the old form, which was developed earlier by the legislator. The Ministry of Finance does not prohibit its use.

Moreover, it contains all the necessary columns. You just have to remember to include it in the company’s accounting policies.

Example of calculating NA

To fully understand how to determine NA, let’s look at an illustrative example:

When calculating the NAV, the debt of the founders for contributions to the management company is not taken into account. We make calculations:

400 + 2,700 + 800 + 300 + 900 – 60 + 300 = 5,400 thousand rubles

To calculate the required indicator in our example of calculating net assets on the balance sheet, we make the following calculations:

2,000 + 300 + 200 + 1,800 = 4,300 thousand rubles

NA=5,400 – 4,300 = 1,100 thousand rubles

The calculation of net assets on the balance sheet for the LLC showed that the NAV has a positive value and amounts to 1,100,000 rubles.

The activities of this company are profitable.

Why should you determine NA?

The size of assets is determined once annually. This indicator is calculated in the following situations:

1. To check the economic status of a legal entity. Calculating net assets on the balance sheet for an LLC makes it possible to assess how efficiently the company operates. The value of the NA is compared with the size of the MC. If the NAV is higher than the UC, then this indicates the stable operation of the company. If a situation arises when the capital exceeds the average, measures should be taken promptly to correct the balance.
2. Dividend payment. According to the law, it is possible to pay dividends to the founders only after studying the financial condition of the enterprise. To do this, you should calculate the ratio of UC and NA. When the size of the NAV is lower than the capital indicator, it is not possible to pay dividends.
3. To establish the actual value of the share. The real price of a shareholder's share is the size of the NAV, which corresponds to the size of a certain share.
4. To increase the UK. An increase in the authorized capital can be achieved through additional contributions from the founders, the company’s own property or at the expense of third parties (if this action does not contradict the company’s Charter). The capital account should be increased by the amount of the difference between the asset value and the capital account.
5. To reduce the Criminal Code. If the volume of the private equity is incommensurate with the capital, then the legal entity must decide to reduce the size of the capital.

Example of a completed balance

Any company has faced the need to calculate net assets on the balance sheet for an LLC or other legal entity.

back to menu ↑

What is net asset value? Calculation formula

Take our proprietary course on choosing stocks on the stock market → training course

The assets include non-current and current assets, with the exception of the debt of the founders for contributions to the authorized capital and the costs of repurchasing their own shares. Liabilities include short-term and long-term liabilities excluding deferred income. The calculation formula is as follows:

Where:

NA – the value of the enterprise’s net assets;

A1 – non-current assets of the enterprise;

A2 – current assets;

ZU – debts of the founders for contributions to the authorized capital;

ZBA – costs of repurchase of own shares;

P2 – long-term liabilities

P3 – short-term liabilities;

DBP – deferred income.

Formula for calculating net assets on balance sheet

Take our proprietary course on choosing stocks on the stock market → training course

Let's look at how to calculate net assets in the balance sheet of an enterprise. They can be determined on the basis of balance sheet data (Form No. 1). The formula looks like this:

The net assets of the enterprise are greater than the authorized capital. How to reduce net assets?

Question: The net assets of an enterprise are greater than the authorized capital. How to reduce net assets?

Answer: Unfortunately, the question does not indicate for what purposes the organization decides to reduce net assets.

The fact is that if the value of net assets is greater than the authorized capital, then the company’s activities are considered successful, and, in addition, a decision can be made on the distribution of profits. However, the excess of net assets over the authorized capital does not oblige the company to increase its authorized capital.

On the contrary, if the value of net assets is less than the size of the authorized capital, then the company is obliged to announce a reduction in its authorized capital to an amount not exceeding the value of its net assets, and also register this change in the prescribed manner. If a company does not have net assets to ensure the minimum amount of authorized capital established on the date of its state registration, then such a company is subject to liquidation.

Nevertheless, we will name situations when the value of net assets may decrease. This can happen as a result of: 1. writing off doubtful accounts receivable;

2. creating reserves (for a decrease in the value of material assets, depreciation of financial investments, for doubtful debts, for upcoming expenses).

In addition, the payment of dividends will reduce the value of the company's net assets.

Dubinyanskaya E.N. Head of the Audit and Finance Department of JSC "United Consulting Group"

Answers to questions are posted in the Legal Reference System "Code" 09/17/2008

Example of calculating the net asset value of a business in Excel

Let's consider an example of calculating the value of net assets for the organization OJSC Gazprom. To estimate the value of net assets, it is necessary to obtain financial statements from the official website of the company. The figure below highlights the balance sheet lines necessary to estimate the value of net assets; the data is presented for the period from the 1st quarter of 2013 to the 3rd quarter of 2014 (as a rule, the assessment of net assets is carried out annually). The formula for calculating net assets in Excel is as follows:

Net assets =C3-(C6+C9-C8)

Tax audits

Tax authorities especially carefully check companies whose net asset value is less than their capital, because such a result is possible if the company incurred large losses in previous periods. The company's management will be invited to a special commission at the tax service, where, together with its employees, methods will be thought through to increase the value of the company's net assets. In this case, to implement such an event, the following methods can be used:

1. revaluate intangible assets or fixed assets of the enterprise;
2. analyze existing accounts payable, which has a direct impact on the cost of the asset. Perhaps some item of debt has expired statute of limitations, and therefore it can be written off;
3. take advantage of the help of company participants who will be able to invest any funds in the organization’s activities free of charge.

Calculation of net assets - topic of the video below:

Net Asset Analysis

Net asset analysis is carried out in the following tasks:

• Assessment of the financial condition and solvency of the company (see → “Company Solvency Indicators”).
• Comparison of net assets with authorized capital.

Solvency assessment

Solvency is the ability of an enterprise to pay for its obligations on time and in full. To assess solvency, firstly, a comparison is made of the amount of net assets with the size of the authorized capital and, secondly, an assessment of the trend of change. The figure below shows the dynamics of changes in net assets by quarter.

Analysis of the dynamics of changes in net assets

Solvency and creditworthiness should be distinguished, since creditworthiness shows the ability of an enterprise to pay off its obligations using the most liquid types of assets (see → How to assess the creditworthiness of a company). Whereas solvency reflects the ability to repay debts both with the help of the most liquid assets and those that are slowly sold: machines, equipment, buildings, etc. As a result, this may affect the sustainability of the long-term development of the entire enterprise as a whole.

Based on an analysis of the nature of changes in net assets, the level of financial condition is assessed. The table below shows the relationship between the trend in net assets and the level of financial health.

Comparison of net assets with authorized capital

In addition to the dynamic assessment, the amount of net assets for an OJSC is compared with the size of the authorized capital. This allows you to assess the risk of bankruptcy of an enterprise (see → 4 bankruptcy assessment models). This comparison criterion is defined in the law of the Civil Code of the Russian Federation (clause 4, article 99 of the Civil Code of the Russian Federation; clause 4, article 35 of the Law on Joint Stock Companies). Failure to comply with this ratio will lead to the liquidation of this enterprise through judicial proceedings. The figure below shows the ratio of net assets and authorized capital. The net assets of OJSC Gazprom exceed the authorized capital, which eliminates the risk of bankruptcy of the enterprise in court.

The significance of calculating the NAV

The value of assets should be calculated once a year. This is required for the following purposes:

1. To exercise control over the financial position of the enterprise. The obtained result helps to assess how efficiently the company operates. The cost of the NA is correlated with the size of the authorized capital (AC). Under normal functioning of the structure, the NA will be greater than the MC. If the situation is exactly the opposite, then measures should be taken promptly to improve the financial health of the company. If the situation does not change within 2 years, then the capital should be reduced or the liquidation of the organization should begin.
2. For the payment of dividends between the founders. According to Russian legislation, dividend distribution is possible only after studying the economic condition of the company. For this purpose, the ratio of the authorized capital and the NAV is determined. If the size of the NAV is less than the authorized capital, then it is impossible to pay dividends.
3. To establish the true value of the founder's share. According to Federal Law No. 14 dated 02/08/1998, the real size of the share of the LLC founder corresponds to the volume of the private equity.
4. Increasing the size of the authorized capital. An increase in the capital is possible due to new property reflected in the balance sheet or if the founders or third parties made an additional contribution. The increase can only be made by the difference between the size of the capital and the capital.
5. Decrease in capital. There are situations when the size of the charter capital should be reduced; this decision is made based on the ratio of private equity and capital.

back to menu ↑

Net assets and net profit

Net assets are also analyzed with other economic and financial indicators of the organization. So the dynamics of growth of net assets is compared with the dynamics of changes in sales revenue and net profit. Sales revenue is an indicator reflecting the efficiency of an enterprise's sales and production systems. Net profit is the most important indicator of the profitability of a business; it is through it that the assets of the enterprise are primarily financed. As can be seen from the figure below, net profit decreased in 2014, which in turn affected the value of net assets and financial condition.

What can be done if the size of the NA is less than the MC

If an organization has a negative value on its balance sheet when calculating net assets for 2021 and this indicator persists for two years, then the organization must be liquidated.

In this situation, the company will not be able to do anything, and liquidation will be carried out forcibly. This is enshrined in the Federal Law “On Tax Authorities of the Russian Federation” dated March 21, 1991 No. 943-I.

Based on this regulatory act, tax authorities have the right to initiate judicial liquidation of a legal entity if its functioning has caused a negative accounting result.

In this case, the organizational form of the company does not matter.

Important! The legislation provides an opportunity for a legal entity, until the 2-year period has expired, to implement preventive measures to improve the company’s health.

The owners of the company need to either increase the size of the NAV or reduce the amount of the capital so that the company continues to operate and is not subject to liquidation. Shareholders are required to make one of these decisions within the first 6 months of the year following the reporting year.

If there is a decrease in the size of the capital, then creditors must be notified of this circumstance, and within 3 days after the occurrence of this event, the information is transferred to the tax service.

With a minimum size of the capital and if the calculation of net assets on the balance sheet for an LLC turns out to be a negative value, then there is a threat of liquidation of the legal entity, and the initiator of this process is the tax inspectorate, which sends the claim to the arbitration court.

The tax authority provides reasons for its request in the liquidation application, but the final decision is made by the arbitration court.

If during the legal proceedings it turns out that the company is able to fulfill its obligations to creditors, does not have large debts, wages are paid on time and in full, and all tax payments are made within the period allotted for this by the legislator, then liquidation will be denied.

back to menu ↑

Analysis of net asset growth rate and international credit rating

In the scientific work of Zhdanov I.Yu. shows that there is a close connection between the rate of change in the net assets of an enterprise and the value of the international credit rating of such agencies as Moody's, S&P and Fitch. A decrease in the economic growth rate of net assets leads to a decrease in the credit rating. This in turn leads to a decrease in the investment attractiveness of enterprises for strategic investors.

Summary

Net asset value is an important indicator of the amount of real property of an enterprise. Analysis of the dynamics of changes in this indicator allows us to assess the financial condition and solvency. The value of net assets is used in regulated documents and legislation to diagnose the risk of bankruptcy of companies. A decrease in the growth rate of an enterprise's net assets leads to a decrease not only in financial stability, but also in the level of investment attractiveness. Subscribe to the newsletter on express methods of financial analysis of an enterprise.

Author: Ph.D. Zhdanov Ivan Yurievich

When should you calculate the NA?

The calculation of net assets on the balance sheet must be calculated in a number of cases:

1. Purchase of a share by an LLC on behalf of the founder of the company, if the Charter states that a third party does not have the right to buy out the share of the management company.
2. If one of the shareholders at the general meeting of the LLC opposed the decision of the remaining shareholders to execute a major transaction or against changing the volume of the charter capital, then the company has the right to purchase his share of the charter capital.

1. If the founder of the LLC is expelled from the company, then his share is transferred to the LLC.
2. The calculation of net assets on the balance sheet should be made when a participant needs to repay debt obligations to creditors of his share.
3. If there is a requirement to establish the financial condition of the organization.
4. When the decision is made to pay dividends to the founders.
5. Decrease or increase of capital.

Important! The volume of assets is a significant indicator for each enterprise. With regular calculation of this parameter, it is easier to make significant decisions; it is an indicator of reliability, stable market positions, and financial stability.

back to menu ↑

Calculation example

Let’s assume that the authorized capital of Guru LLC has been paid in full. There were no gratuitous receipts or state aid. Balance sheet indicators as of March 31, 2019:

• asset (line 1600) – RUB 1,500,000;
• long-term liabilities (line 1400) – RUB 1,000,000;
• short-term liabilities (line 1500) – RUB 300,000;
• capital and reserves (line 1300) – 200,000 rubles. (RUB 1,500,000 – RUB 1,000,000 – RUB 300,000).

Then, net assets as of March 31 are equal to RUB 100,000 . (200,000 rub. – 0 rub. + 0 rub.).

The law indicates the need for an annual report on net assets over the past 3 years, as well as measures to improve the situation with them.

Also see Net Asset Analysis.

Chain analysis online

When calculating net assets on the balance sheet, the online calculator will help the accountant calculate this indicator in a matter of minutes.

To receive this calculation, you must fill out the balance sheet data in the table provided by the service.

Important: There is currently no accepted form for calculating the analysis of NAV; companies must develop the form independently and approve it as an annex to the accounting policies.

You will be asked to calculate the NA in two ways, which are regulated by Russian legislation.

Using net assets (balance sheet calculation formula) will allow the accounting department to quickly prepare the required form.

On the online service AnFin.ru you can not only calculate net assets using the balance sheet calculator online , but also order a free financial analysis of the company, which contains the following information:

1. Analysis of the company's solvency based on its net assets.
2. Assessment of a company's economic activity based on a financial analysis of the company.
3. Solvency according to the average is calculated.
4. Assets and liabilities are defined by groups.
5. The financial stability of the company has been established.
6. You will be asked to analyze the aggregated balance sheet by year.
7. The service will calculate the profitability, profitability and efficiency of the company.
8. The structure of balance sheet assets in percentage and their dynamics will be given.

When calculating net assets by balance sheet online calculator, you can request an in-depth study of the company's financial condition. It includes:

1. Company assessment using Altman's five-factor model. The calculation is relevant for companies whose shares are listed on stock exchanges.
2. Enterprise assessment using the modified Altman five-factor model. The calculation is needed for those legal entities whose shares are not bought or sold on stock exchanges.
3. Checking the correctness of filling out the old and new accounting forms.
4. Calculation of the effect of financial leverage.
5. Conducting an analysis of the financial results of a legal entity.
6. Checking a company for the possibility of bankruptcy using the Fulmer model.
7. Analyst of the company's solvency according to NA.
8. Calculation of the operating leverage effect, which shows by what percentage profit will change if sales volume changes by 1%.

After conducting a financial analysis of the company, carried out when calculating net assets on the balance sheet of the online calculator, problems that the company must solve to strengthen its financial stability will be identified, and measures to improve the legal entity will be proposed.

Here are just some of the problems on which the company will receive recommendations:

1. Problems with the unsatisfactory condition of any of the balance sheet and income statement items.
2. Decrease in product sales.
3. Deterioration of marketing activity.
4. Fall in production volumes.
5. Ineffective staff performance.
6. Increase in production costs.
7. Low efficiency in using profits.
8. Decrease in investment activity.
9. The presence of a negative forecast for the economic situation.
10. The emergence of bankruptcy risk.

As can be seen from the above, analysis and regular calculation of net assets will help a legal entity prevent financial losses.

back to menu ↑

Net Assets