Net Asset Value – NAV: Value Investing
What is NAV? From an investing perspective, NAV is Net Asset Value.
How to calculate Net Asset Value (NAV). Calculating Net Asset Value is theoretically as simple as: NAV = Total Assets – Total Liabilities. There are some differences in the calculation of NAV depending on what type of investment is being examined but the overall principle is the same.
Value Investing Strategy: Buying at a Discount to Net Asset Value (NAV). A value investing strategy that is common among value investors is to buy stocks that are trading significantly below their NAV or Net Asset Value. This provides a margin of safety. Some value investors will also deduct the value of intangible assets from their calculation of NAV. One of the first value investing strategies published was to buy stocks trading at a discount to their Net Net Working Capital.
Mutual funds – Net Asset Value per Unit (NAVPU). NAVPU is the dollar value per mutual fund unit after subtracting the funds’ liabilities from the assets and then dividing that figure by the number of units issued and outstanding. Typically, liabilities of most long-only mutual funds are relatively low compared to the amount of assets. Generally speaking, mutual funds are quoted at NAVPU and can be sold or purchased at a price equal to NAVPU less transaction costs. Mutual funds are often referred to as open-ended funds because they can be bought and sold at NAVPU at most anytime.
Closed-end Funds – Net Asset Value per Unit (NAVPU). The NAVPU for closed-end funds is calculated in the same manner as mutual funds or open-end funds – i.e. total assets less total liabilities divided by the number of units issued and outstanding. The difference with closed-end funds is that they are typically not redeemable by the investment manager. Investors in closed-end funds looking to liquidate or cash-in their position must generally do so by selling their units to another investor which is often done so at a discount to the NAVPU. Closed-end funds often trade on exchanges like any other stock. This makes closed-end funds susceptible to the day-to-day supply and demand of the units which also contributes to whether the units are trading at either a discount or premium. Closed-end funds often trade at a premium in a short period subsequent to an IPO but thereafter trade at a discount to NAVPU.
Common Stock: Net Asset Value Per Share (NAVPS). Basic NAVPS is calculated as total assets less total liabilities. This is also sometimes referred to as Book Value per Share or Equity per Share. Variations of calculating NAVPS can also include estimating a current market value of assets. Since accounting rules typically require companies to value assets at historical cost, there can be wide and significant variations between the book value of an asset and the current market value.
Common Stock: NAVPS for Commodity Based and Precious Metal Stocks. NAV per share is typically calculated and reported by engineers for oil and gas stocks as well as mining stocks. These calculations are generally required to be disclosed in regulated annual reporting forms. Engineers calculate NAV by discounting future net cash flow streams (i.e. discounting the revenues less operating costs and some capital costs). Stocks rarely trade at a price equal to NAV and could trade at either a discount or premium reflecting numerous other factors such as short-term supply and demand of a stock, investor outlook, whether or not a current sector is favoured by the market or not, differences in the discount rate used by Engineers versus investors, etc.
Net Asset Value (NAV) is an important component of value investing strategy. How NAV is calculated depends on the type of investment being evaluated as well as the assumptions that an investor makes in regards to each variable that is used to calculate Net Asset Value (NAV). NAV is another tool that value investors may use to evaluate a stock or any other investment.
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