Effective Net Worth

The shareholders' equity of a corporation, plus subordinated debt. Effective net worth is particularly useful in closely held corporations, since executive officers in these entities are also its owners. Subordinated debt can include debentures or loans to the firm by an owner. Such owners' loans are considered an extension of the company's net worth, provided a subordination agreement is already in place.

For example, a closely held corporation with total assets of $10 million and total liabilities of $6 million would have a net worth of $4 million. Assume total liabilities include subordinated loans such as debentures and loans from owners of $1 million. Effective net worth in this case would be $5 million.

Investment dictionary. . 2012.

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