The Net Asset Value (or "NAV") of a company is the residual interest in its assets are all its liabilities have been deducted. In other words, the NAV is the company's equity and is viewed as a buffer against which the company's market cap should rarely drop below.
"NAV" or "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, though, shares do trade below this ratio for a number of reasons … not all of them good. Sometimes the market is factoring in a future loss or stream of losses that will knock into the assets of the business, so trading below this ratio is not always a sign of a bargain.
Looking closer at NAV, though, a company's books often include assets like software, goodwill, and / or capitalized contracts that might not be worth the same monetary value as they were bought for (hence accounted for). The majority of these assets fall under the category of "intangible assets" (as defined by the IFRS) and are excluded from total assets when calculating the Tangible Net Asset Value or Net Tangible Asset Value ("TNAV").
The TNAV per share is a very harsh measure of the absolute bottom level that any share in a profitable business should trade, as it assures that all intangible assets are worthless. In a way, the TNAV can be viewed as a liquidation value of a business (except for the accounting limitations explained below).
NAV and TNAV are both balance sheet based on ratio's and are dependent on the reliability of the balance sheet. In turn, the balance sheet is subject to the same limitations and inconsistencies that plague the accounting system that creates it.
Accounting's inconsistencies are numerous and include the following major ones:
* Some assets are capitalized at historic cost and this differences from both their resale value / fair value and / or their replacement cost. Which one is more important for NAV and TNAV …?
* Some assets are fair valued while others are not. Thus, you are essentially using apples and banana's in the same ratio.
* Estimates are an inherent risk in accounting. Accountants have to estimate useful lives of assets for depreciation, estimate residual value to depreciate to, estimate warranties and returns for provisions etc. All these estimates are open to both manipulation and / or error, which add to the unreliability of the temporary ratio.
Thus, while NAV and TNAV are useful to look at, their limits should be understood. Also, although a business's assets are important, its ability to generate a profit is far more important than an investor's point of view and should be emphasized over any liquidation values.