The net asset value (or “NAV”) of a company is the residual interest in its assets if all its liabilities have been deducted. In other words, the NAV is the capital of the company and is considered as a buffer against which the company’s market capitalization should rarely fall below.

“NAV” Prayed “Shareholder Equity / Number of Shares” = “NAV per share” and should serve as a rough benchmark below which a good company’s share price should not trade. Sometimes, however, stocks trade below this ratio for various reasons…not all good ones. Sometimes the market factors in a future loss or loss stream that will affect the company’s assets, so trading below this ratio is not always a sign of a bargain.

However, looking more closely at the NAV, a company’s books often include assets such as software, goodwill, and/or capitalized contracts that may not be worth the same monetary value for which they were purchased (hence accounted for). Most of these assets fall into 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 harsh measure of the absolute minimum level that any stock in a profitable business should trade, since it assumes that all intangible assets are worthless. In a way, the TNAV can be seen as a liquidation value of a business (except for the accounting limitations explained below).

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

Accounting inconsistencies are numerous and include the following main ones:

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

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

* Estimates are an inherent risk in accounting. Accountants must estimate the useful life of assets for depreciation, estimate residual value for depreciation, estimate warranties and returns on provisions, etc. All of these estimates are open to both manipulation and error, adding to the unreliability of the final relationship.

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