Net asset value
According to the net asset value method an in simple terms, the value of a company corresponds to the valued assets less the valued liabilities of the company. The method is explained below.
Net asset value method
With the net asset value method, all existing assets are on the balance sheet are summed up. Most commonly the net asset value is determined according to on going concern values (so-called reproductive values). All assets together form the total of the company’s assets and referred to as the gross asset value.
To work out the net asset value of the company, i.e. the intrinsic value of equity, the debt (all debt and liabilities of the company) is deducted from the gross asset value.
Book value, hidden reserves and deferred taxes
The assets as per the balance sheet represent book values and need to be revised first. The difference between the book values and the actual values (the replacement values) includes hidden reserves. Hidden reserves may result in latent taxes on the incremental earnings in case such hidden reserves are dissolved.
The deferred taxes can be taken into account when calculating the net asset values, by multiplying the valuation difference (between book values and replacement values) by half the tax rate and subtracting it from the net asset value. Using half of the tax rate takes into account the delay for when the taxes are due (time value of money) and, on the other hand, the ability to plan the dissolve of such hidden reserves (the tax burden will not turn out quite so high).
Going concern value (reproduction or replacement cost)
With the net asset value assuming going concern, the assets are valued at today’s replacement cost at market prices. The going concern value indicates how much the replacement cost would amount to in order to repurchase the company’s assets. In order to determine the replacement values, current repurchase costs can be used from which the depreciation (consumption value) is to be deducted on grounds of age.
Liquidation Value
The net liquidation value is the value that can be obtained by sell off the assets and deducting all liabilities and related liquidation costs. It should be noted that in case of a liquidation, the realized prices may be lower due to the tight time frame and the particular application range of the assets to be liquidated.
Non-operational assets
When valuing a company using the net asset value method, the operational assets are added up in the first place. The company may have, however, additional non-operational assets such as real estate, which are not related to the operational activities, or there is excess liquidity on the balance sheet that is not needed for the operation (this is usually not the case for smaller companies). These non-operational assets are to be listed separately and added to the net asset value while being disclosed separately.
Conclusion for the intrinsic value method
The net asset value is a snapshot of all assets of a given company. The net asset value represents the effective value of the equity, i.e. the asset values corrected for hidden reserves and pending taxes, minus the debts or liabilities of the company. The net asset value can be interpreted as the lower limit of a valuation of a company because tangible assets are physically present at the time of the valuation.
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