Net Tangible Assets

Also known as “Book Value” or “Net Asset Value”, it is a measurement of the underlying value of the company. It is calculated as¬†total assets minus the value of its total liabilities and the value of its intangible assets such as patents, trademark, and goodwill, divided by the number of shares on issue. The idea is, how much the company actually valued at if it was to cease operation the next day. The idea is: By paying off its liabilities, and deducting the intangible assets such as goodwill, and trademark, how much will the shareholders eventually get paid?

The best source to obtain the information about Total Assets, Total Liabilities, and Intangible Assets is in the Statement of Financial Position of the Annual Report.

Generally, value investors comparing the market value of a stock with its NTA, or something called Price to Book Value ratio (P/BV). Price divide by book value of less than 1 means that the stock has been undervalued. In a layman term, the company is worth more than what it is traded in the market. In contrast, P/BV of more than 1 indicates an overvalued stock.

As with other quantitative measurement, we do not invest based solely on P/BV, i.e. ones do not blindly buy into stocks with P/BV < 1. The reason being, a company can be highly undervalued but still has no potential if for instance it is lacking its ability to earn profit with its existing assets. This means, if earning is low and did not show any growth in recent years, it is not worth buying in even if it has low P/BV of 0.6 for example. Just think of Book Value as something that you will only get if company goes into bankruptcy or (perhaps) privatised. Also, do note that, in the case of a company in financial difficulties and facing bankruptcy, the book values used for the assets may turn out to have been too high and not realisable under the fire sale conditions that are then likely to prevail.

For some cases, book values can also be too low rather than too high, particularly if assets have not been revalued recently in order to allow for inflation and the costs of replacement.

In conclusion, when taking this measurement together with others such as EPS, Dividend Yield, Net Tangible Asset can be used to evaluate if you are paying reasonably for a stock.

 

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