Net Asset Value and Tangible Net Asset Value

The Net Asset Value (or “NAV”) of a company is the residual interest in its assets and all of its liabilities have been deducted. In other words, the NAV is the capital of the company and is considered a cushion against which the market capitalization of the company should rarely fall below.

“NAV” gold “Stockholders’ equity / Number of shares” = “NAV per share” and it should serve as a rough benchmark below which the stock price of a good company should not trade. Sometimes, however, stocks trade below this ratio for a number of reasons … not all of them are good. Sometimes the market takes into account a future loss or a stream of losses that will affect the assets of the company, so trading below this ratio is not always a trading signal.

However, taking a closer look at NAV, a company’s books often include assets such as software, goodwill, and / or capitalized contracts that may not have the same monetary value for which they were purchased (thus, they were accounted for ). Most of these assets fall under the category of “intangible assets” (as defined by IFRS) and are excluded from total assets when calculating tangible net asset value or tangible net asset value (“TNAV”).

The TNAV per share is a very strict measure of the absolute minimum level that any stock must trade in a profitable business, since it assumes that all intangible assets have no value. In a way, TNAV can be viewed as a liquidation value of a company (except for the accounting limitations explained below).

NAV and TNAV are balance-based indices and depend on balance reliability. In turn, the balance sheet is subject to the same limitations and inconsistencies that plague the accounting system that creates it.

Accounting inconsistencies are numerous and include the following important ones:

* Some assets are capitalized at historical cost and this differs from both their resale / fair value and their replacement cost. Which is more important for NAV and TNAV …?

* Some assets are of fair value, while others are not. So you are essentially using apples and bananas in the same ratio.

* Estimates are an inherent risk in accounting. Accountants should estimate the useful life of assets for depreciation, estimate residual value for depreciation, estimate collateral and provision yields, etc. All of these estimates are open to both manipulation and errors, which add to the unreliability of the final ratio.

Therefore, although NAV and TNAV are useful for observing, their limitations must be understood. Also, while a company’s assets are important, its ability to generate profit is far more important from an investor’s point of view and should be emphasized over any liquidation value.

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