For those who are learning how and where to invest money in Singapore as a beginner, it is important to know which type of investor you are. You might be a firm believer in fundamentals and believe in intrinsic value. If you are, then knowing the concept of net asset value is key to your personal growth as a value investor.
What is Net Asset Value
Net asset value is basically the residual equity value left in any company or entity after you deduct the liabilities from the assets. In short, it is the value that remains if the company were to be liquidated and the remaining value returned to the owners of the equity.
Net Asset Value Calculation
Net Asset Value = Total Asset – Total Liabilities
The Benefit of Using Net Asset Value
By looking at Net Asset Value (NAV), you are essentially taking the perspective of a value investor. This is because, NAV does not consider future growth of a company and is only concerned in its current existing value.
Using NAV per share, it is then possible to classify investments as either being at a discount or premium. If we are able to acquire an investment at an NAV discount, it would mean that we would be purchasing the asset at a discount. On the other hand, buying an investment at an NAV premium would mean that we are paying more than the asset is worth.
Nuances of Net Asset Value
If it is possible to calculate that a company is at NAV premium or discount, why would anyone sell anything at an NAV discount?
Net asset value is often calculated based on the company’s balance sheet which is often calculated at cost. What this means is that the Net Asset Value is in many sense a historic cost basis and may not entirely reflect the current residual value. It is because of this