Net Asset Value (NAV) [CapiPedia]

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======Net Asset Value (NAV)======
Net Asset Value (NAV) is essentially a company's or a fund's net worth on paper, calculated from its financial statements. Think of it like calculating your own personal net worth: you add up everything you own of value (your assets, like a house, car, and savings) and subtract everything you owe (your liabilities, like a mortgage, car loan, and credit card debt). What’s left is your personal net worth. For a company, NAV is the same idea. It represents the theoretical value of a company’s net assets that common shareholders would receive if the business were to be liquidated immediately—meaning all its assets were sold off at their book values and all its debts were paid. While it’s a foundational metric, especially in [[Value Investing]], it’s crucial to understand both its power and its limitations.
===== The Core Idea Behind NAV =====
At its heart, NAV is a simple accounting measure designed to give you a baseline valuation for a company or a fund. It strips away market sentiment and speculation to provide a "by the books" look at value.
==== The Simple Math ====
The formula for NAV is straightforward and elegant:
  * **NAV = Total [[Assets]] - Total [[Liabilities]]**
This figure gives you the total net worth of the entire entity. However, as an investor, you don't own the whole company; you own shares. That’s why the next step is so important.
==== NAV Per Share ====
To make NAV useful for comparing to a stock's market price, we calculate the NAV per share. This breaks down the total NAV to a per-share basis.
The formula is:
  * **NAV Per Share = NAV / Total Number of [[Shares Outstanding]]**
For example, if a company has a NAV of $100 million and 10 million shares outstanding, its NAV per share is $10 ($100 million / 10 million shares). You can then compare this $10 figure to the stock's current market price.
===== Why NAV Matters to a Value Investor =====
For a value investor, the relationship between a stock’s price and its NAV per share is a treasure map for finding potential bargains.
==== Hunting for Bargains ====
The legendary father of value investing, [[Benjamin Graham]], was a master at using NAV. He famously scoured the market for companies trading at a significant discount to their NAV, particularly their net //current// asset value. The logic is beautifully simple: if you can buy a company's stock for significantly less than what its assets are worth on paper, you have a built-in [[Margin of Safety]]. It's like buying a dollar's worth of assets for 50 cents. Even if the business itself isn't a world-beater, you have a good chance of coming out ahead because the assets alone are worth more than what you paid.
==== A Reality Check for Funds ====
NAV is also the bedrock of the fund world.
  * For a [[Mutual Fund]], NAV per share is calculated at the end of each trading day, and that is the price at which investors buy (subscribe) or sell (redeem) shares in the fund.
  * For an [[Exchange-Traded Fund]] (ETF), the market price generally tracks the NAV per share very closely throughout the day due to a unique creation/redemption mechanism.
  * A significant and persistent gap between the market price and NAV of a fund can signal either an opportunity or a problem, especially in the case of closed-end funds, which can trade at large premiums or discounts for long periods.
===== The Limits of NAV =====
While NAV is a fantastic starting point, relying on it blindly is a classic rookie mistake. It’s an accountant's view of the world, and it has some major blind spots.
==== What's Not on the Books? ====
The biggest limitation of NAV is that it's based on the company's [[Balance Sheet]], which often fails to capture a company’s most valuable assets. These include:
  * **Intangible Assets:** The value of a powerful brand (like Apple or Coca-Cola), patents, proprietary technology, or a loyal customer base.
  * **Earning Power:** A company's ability to generate future profits is not reflected in its NAV. A highly profitable, asset-light tech company might have a low NAV but be an incredible investment.
  * **Management Skill:** A visionary leadership team can create immense value that will never appear on a balance sheet.
==== Book Value vs. Market Value ====
Remember, the "value" in NAV is **book value**, which can be a historical relic. A piece of land bought 50 years ago might be on the books for its original purchase price, which could be a tiny fraction of its current market value. Conversely, inventory or machinery might be overvalued on the books if it has become obsolete. Therefore, a smart investor always asks: "What is the //real//, current market value or liquidation value of these assets?" The answer may be very different from what the accounting statements say.