What is net worth? (and why it is not market value)

Net worth is what a business or person owns minus what they owe, taken from the balance sheet.

Written 19 September 2026. For bankers in India.

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In one line

Net worth is total assets minus total liabilities. For a company, it is read from the audited balance sheet, not guessed.

Why it matters to you

• Base of key ratios. Net worth is the bottom part of the debt-equity ratio.
• Feeds a stricter ratio too. Total Outside Liabilities to Tangible Net Worth uses a tighter version of it.
• Shows what a borrower has built. Capital put in, plus profits kept back over the years.
• A stricter cousin exists for lenders. Non-banking financial companies must hold a minimum "Net Owned Fund".
• Easy to confuse with sale price. A business can sell for far more, or far less, than its net worth.
• Gets misquoted often. One wrong reserve can overstate net worth by lakhs.

How it works

For a company, net worth comes from the Companies Act, 2013, section 2, clause 57.

In words:

1. Start with paid-up share capital. This is money shareholders paid for their shares.
2. Add free reserves. This is profit kept back, not spent or given out.
3. Add the securities premium account. This is extra money shareholders paid above the face value of a share.
4. Add the profit and loss account balance, if it is a credit balance.
5. Subtract that balance instead, if it is a debit balance.
6. Subtract deferred expenditure and other expenditure not yet written off.
7. Leave out reserves from revaluing an asset, or from writing back depreciation.
8. Leave out reserves from an amalgamation too. These are not real net worth, even though they sit with other reserves.

In symbols:

Net worth = PC + FR + SP + PL − DE

Here, PC is paid-up capital and FR is free reserves. SP is the securities premium account. PL is the profit and loss balance. DE is deferred or other expenditure not written off.

One source we checked says a 2017 law change removed the securities premium account from this formula. The official notification of that change shows this is wrong. It kept the account, and added the profit and loss balance. This page follows the official notification.

For a non-banking financial company, a related but stricter number applies. It is called "Net Owned Fund", fixed by the Reserve Bank of India Act, 1934, section 45-IA. It starts from a similar formula. It then also subtracts loans and investments in group companies, once these cross 10 per cent of that starting figure.

Worked examples

Example 1: Net worth from a balance sheet, and a common mistake

XYZ Textiles Private Limited has this in its audited balance sheet:

• Paid-up equity capital: Rs 2,00,00,000
• Free reserves (built from profit): Rs 3,50,00,000
• Securities premium account: Rs 30,00,000
• Credit balance in the profit and loss account: Rs 20,00,000
• Miscellaneous expenditure not written off: Rs 5,00,000
• Revaluation reserve, from revaluing its factory land: Rs 1,00,00,000

Correct net worth: Rs 2,00,00,000 + Rs 3,50,00,000 + Rs 30,00,000 + Rs 20,00,000 − Rs 5,00,000 = Rs 5,95,00,000.

The revaluation reserve of Rs 1,00,00,000 is left out. If a credit note wrongly adds it, net worth reads as Rs 6,95,00,000, which is Rs 1,00,00,000 too high. Always show which figures went into the total, so a reader can check the same sum.

Example 2: A fast-growing company, market value well above net worth

ABC Fintech Limited has net worth of Rs 40,00,00,000 and 1,00,00,000 shares.

• Book value per share: Rs 40,00,00,000 ÷ 1,00,00,000 = Rs 40.
• Market price per share: Rs 220.
• Market value (market capitalisation): Rs 220 × 1,00,00,000 = Rs 220,00,00,000.
• Price to book ratio: Rs 220 ÷ Rs 40 = 5.50.

The market values this company at more than five times its net worth. Investors are paying for expected future growth and brand value, neither of which sits on the balance sheet.

Example 3: A stressed company, market value below net worth

PQR Steel Limited has net worth of Rs 60,00,00,000 and 3,00,00,000 shares.

• Book value per share: Rs 60,00,00,000 ÷ 3,00,00,000 = Rs 20.
• Market price per share: Rs 12.
• Market value (market capitalisation): Rs 12 × 3,00,00,000 = Rs 36,00,00,000.
• Price to book ratio: Rs 12 ÷ Rs 20 = 0.60.

Here the market thinks the balance sheet overstates true value, perhaps because of bad debts or ageing plant. Net worth alone does not tell a lender this. Cash flow and repayment history matter too.

What the rule says

NO RBI NUMBER: a general law fixes net worth for a company, not the Reserve Bank of India. The Companies Act, 2013, section 2, clause 57 sets the formula. It is not fixed by each bank's own policy either. The clause lists paid-up share capital, reserves built from profit, the securities premium account, and the profit and loss balance. It subtracts deferred and other expenditure not written off. It excludes revaluation reserves, depreciation write-back reserves, and amalgamation reserves.

BANKPULSE VIEW: one source we read says a 2017 law change removed the securities premium account. The official gazette notification of that change says otherwise. It kept the account, and added the profit and loss balance. This page follows the gazette text.

NO RBI NUMBER: the Reserve Bank of India does not define "net worth" for a bank's own strength. It uses capital adequacy rules and Tier capital instead.

RBI RULE: a non-banking financial company must hold a minimum "Net Owned Fund". This comes from the Reserve Bank of India Act, 1934, section 45-IA. It is net worth, reduced further. Loans and investments in group companies are subtracted, once they cross 10 per cent of the starting figure. This 10 per cent rule took effect on 2 July 2015, under Reserve Bank of India circular RBI/2015-16/114. Housing finance companies have a similar rule, under the National Housing Bank Act, 1987, section 29A.

BANKPULSE VIEW: this page does not give the current minimum rupee amount for Net Owned Fund. We could not open the Reserve Bank of India's own current Master Direction to check that figure in this research round.

Common mistakes

• Adding revaluation reserve. This inflates net worth. Leave it out, even though it sits with other reserves.
• Treating net worth as sale price. A buyer pays for growth and brand too. Use it only for accounting ratios.
• Confusing net worth with Net Owned Fund. That is a stricter, lender-only number. Check which term the document uses.
• Using an old balance sheet. Net worth changes every year. Always use the latest audited figures.
• Trusting a summary over the law. One summary we found got a line item wrong. Check the notification itself.

How to use it at your desk

1. Open the borrower's latest audited balance sheet.
2. Add paid-up capital, free reserves, and any credit balance in profit and loss.
3. Subtract deferred and other expenditure not written off.
4. Remove revaluation, depreciation write-back, and amalgamation reserves, if any are shown.
5. Check if your policy needs net worth, or a stricter number instead.
6. Never quote net worth as what the business would sell for.

Related terms

• Debt-equity ratio — Net worth is the equity part on the bottom of this ratio.
• Total Outside Liabilities to Tangible Net Worth — This ratio uses a stricter, tangible version of net worth.
• Current ratio — Another balance sheet check read next to net worth.
• Product rule pages: Working capital rules.

Quick check

Does net worth include a revaluation reserve?

Answer: No. Revaluation reserve is left out, even though it is shown with other reserves.

Is net worth the same as the price a buyer would pay for a business?

Answer: No. Net worth is a book figure. Market value can be far higher or lower.

Does the Reserve Bank of India fix a "net worth" number for banks?

Answer: No. Banks are judged on capital adequacy and Tier capital instead.

Sources

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