Net assets

Net assets represent the total assets of a company minus its total liabilities: the residual value belonging to shareholders, equivalent to equity. On the balance sheet, they comprise paid-in capital, share premium, legal and voluntary reserves, retained earnings and OCI reserves. At book value, net assets equal shareholders' equity; at economic or restated values, they form the basis of the asset-based valuation method. In business valuation, book equity rarely equals economic value, particularly for Swiss CO companies where the prudence principle allows significant understatement of asset values. In financial due diligence, net asset analysis identifies hidden reserves, off-balance-sheet obligations and asset quality issues that affect the true economic net worth of the company. The revalued net asset approach corrects book values to economic values and serves as the reference method for holding companies and asset-intensive businesses. The gap between a transaction price and net assets reflects unrecorded intangibles and expected profitability.

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Formula: net assets = total assets - total liabilities, equivalent to share capital + share premium + reserves + retained earnings. A company holding CHF 14.0 million of assets against CHF 5.5 million of liabilities therefore reports net assets of CHF 8.5 million.

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Net assets should not be confused with net book value, which designates the carrying amount of an individual asset after depreciation, nor with equity value, the price actually paid for the shares, which exceeds accounting net assets whenever earnings power justifies goodwill. In Swiss practice, restated net assets correspond to the substantial value used as the asset component of the practitioners' method.

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Example: a Swiss company reports book net assets of CHF 8.5 million. Economic restatement reveals: real estate undervalued +CHF 2.2 million, machinery with hidden reserves +CHF 600,000 and unrecognised pension deficit -CHF 1.8 million. Restated economic net assets amount to CHF 9.5 million, the basis for the asset approach component in the practitioners' method valuation. In another case, a Swiss industrial company reporting book equity of CHF 6.0 million reaches economic net assets of CHF 9.1 million after revaluing real estate (+CHF 2.5 million), deducting unrecognised pension liabilities (-CHF 1.2 million) and recognising previously unbooked intangibles (+CHF 1.8 million): a 52% premium over book value, illustrating the gap between CO accounting and economic reality.

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Hectelion analyses book and economic net assets in every Swiss and French valuation and bridges book equity to economic net assets in acquisition due diligence, identifying all material adjustments for a fair economic picture.