Net Asset Value - Businesses

Businesses

Turning to operating companies as opposed to investment companies (mutual funds), 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 (being the price at which the market values the company) with its NAV. The NAV may be below the market price for the following reasons:

• The NAV describes the company's current asset and liability position. Investors might believe that the company has significant growth prospects, in which case they would be prepared to pay more for the company than its NAV. Also, accounting principles and basis of presentation of amounts in financial statements vary around the globe, further blurring the comparability of companies in various jurisdictions.

• The current value of a company's assets likely differ than the historical cost financial statements used in the NAV calculation (and financial statement values and related principles of accounting vary from

• 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.

A company's market value will not always be greater than its NAV. For example, analysts and management estimated that Liberty Media Corporation was trading for 30-50% below its net asset value (or "core asset value") in June 2007. Where a company's market value is lower than its NAV, it may be considered more profitable to wind the company up and sell off its assets individually rather than continue to run it as a going concern.

In contrast to fund valuation, the assets of a company will generally be valued for the purpose of a NAV calculation using the book value, the historical cost or the amortised cost of the company's assets, or an appropriate combination of the three.