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Net asset value in a firm is the organization’s total assets less its total liabilities. The remaining figure — whether positive or negative — is the net asset value of the firm. Companies and organizations use this figure to determine the amount of wealth generated from business operations. Improving this figure comes in one of two ways: increasing sales or lowering expenses. Engaging in activities that accomplish one or both of these goals will allow the company to reduce debt or purchase more assets that will help the company increase it economic wealth.
Accountants often use the total debt to total asset ratio to determine how much debt the company uses to finance its assets. Over-leveraging assets through increased debt not only increases the risk of the company, but it also provides a negative picture to external investors and stakeholders. To calculate this ratio, accountants will divide the total debt listed on the balance sheet by the total assets listed on the same financial statement. For example, if a company has $1,500,000 US Dollars (USD) in debt and $5,000,000 USD in assets, the company’s total debt to total asset ratio is .30 for the particular time period. This means the company finances every $1 USD of assets with $.30 USD in debt. Higher ratios present a more negative picture than a lower total debt to total asset ratio.
Companies can improve their net asset value ratio by reducing the debt associated with purchasing or using assets. To do this, the company needs to improve its net profit. Increasing sales by reaching new customers or markets allows the company to experience higher profits from larger sales volume. Extra capital earned from these sales can go toward debt reduction to improve the company’s net asset value. Cutting costs works in a similar manner. Reducing expenditures such as labor or payroll, utilities and maintenance costs is the other way to lower debt. Money saved from lower costs allows for more money to go against the company’s outstanding debt.
Smaller companies can avoid high total debt to total asset ratios by growing through operational profits. Using earned capital rather than outside debt to purchase and use assets will improve the company’s net asset value. Unfortunately, forgoing debt as a growth tool typically means the company will grow more slowly than firms using debt. Debt allows for quick growth, especially in industries with high profit margins. Using operational profits for growth, however, will allow for a more stable and less risky approach for growing economic wealth.
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