One of the key balance sheets components surety underwriters will look at when considering a company for surety credit is Net Worth, also referred to as Shareholders Equity. The technical definition of Net Worth is simply a firm’s total assets minus its total liabilities. The components of Net Worth are:
- Retained Earnings – the amount of profit the company has earned and has retained in the company. minus treasury shares.
- Common or Preferred Stock – represents the amount by which a company is financed through common and preferred shares.
- Additional Paid In Capital – Monies deposited into the company in excess of the par value of the shares.
The amount of the net worth is important to to the surety company because Net Worth, in essence, represents the loss absorption capability of the company. The surety company wants to make sure a the company it bonded has adequate reserves to complete the work that hit issued performance and payment bonds on. Generally, a surety will require Net Worth of 5% to 20% of the amount of work outstanding. The range depends on many variables, including the trade of the contractor (subcontractors generally require a higher net worth then a general contractor), the over size of the contractor, just to name two. IF the surety company requires a contractor to maintain “a 5% case”. This means the contractor must have 5% of its backlog in Net Worth. So if the contractor has $10 million in uncompleted work, the surety would require $500k in net worth to continue supporting the contractor with bonding.
This is a very basic description of what net worth is how it relates to bonding capacity. Should you like further information on this, or any other item related to surety bonds, feel free to call Surety1 and speak to a bonding expert.