What is Net Asset Value (NAV)?
Net Asset Value (NAV) is the value of an entity’s assets less the value of its liabilities. In other words, it is the the total equity plus the retained earnings of a company.
Internationally the term is most commonly used in relation to mutual funds due to the fact that shares of such funds are often redeemed at their net asset value. For mutual funds NAV per share is computed based on the closing market prices of the securities in the fund’s portfolio.
However, in Bangladesh the term is also used as a synonym for book value or the equity value of a business. Net asset value here represents the value of the total equity and retained earnings. Net Asset Value Per Share is computed by dividing the NAV by the number of shares outstanding held by investors.
It is a valuation of a stock considering the company is liquidated on the date.
In determining whether shares in a public company are a cheap or expensive investment, one tool used by investors is a comparison of the company’s current market capitalization (the price at which the market values the company, i.e. market price) with its NAV. The NAV may be below the market price for the following reasons:
- Investors believe that the company has significant growth prospects. They are prepared to pay more for the company than its NAV.
- The current value of a company’s assets likely differ than the historical cost financial statements used in the NAV calculation.
- Certain assets, such as goodwill (which broadly represents a company’s ability to make future profits), are not necessarily included on a balance sheet and so will not appear in an NAV calculation.
If a company’s market value (or share price) is significantly lower than it’s NAV per share for a long period – it is more profitable for the shareholders to wind up the company than to continue operation.