NAV (Net Asset Value)

The NAV is the value per share of a fund it reflects the fund's underlying value and guides buying and selling decisions

Author: Punit Manjani
Punit Manjani
Punit Manjani
Punit Manjani is a highly skilled professional with experience in VC, contributing to strategic investments, Market research, and deal sourcing. Currently, Punit works at Loka Capital demonstrating expertise in financial modeling, due diligence, and market research. Known for negotiation and leadership prowess, Punit has a proven track record of successful leadership and entrepreneurial endeavors.
Reviewed By: Elliot Meade
Elliot Meade
Elliot Meade
Private Equity | Investment Banking

Elliot currently works as a Private Equity Associate at Greenridge Investment Partners, a middle market fund based in Austin, TX. He was previously an Analyst in Piper Jaffray's Leveraged Finance group, working across all industry verticals on LBOs, acquisition financings, refinancings, and recapitalizations. Prior to Piper Jaffray, he spent 2 years at Citi in the Leveraged Finance Credit Portfolio group focused on origination and ongoing credit monitoring of outstanding loans and was also a member of the Columbia recruiting committee for the Investment Banking Division for incoming summer and full-time analysts.

Elliot has a Bachelor of Arts in Business Management from Columbia University.

Last Updated:September 7, 2023

What is NAV (Net Asset Value)?

The net value of the company's assets is less its liabilities. It is often the case that the net asset value is close to or equal to the book value of a business. Companies considered to have high growth prospects are traditionally valued more than NAV might suggest.

In some cases, the discounted cash flow (DCF) model cannot be used as it assumes the company's perpetual growth. However, this isn't the case with these models; hence energy companies (which can't assume perpetual growth because of limited natural assets) use them.

Here is the calculation formula:

Net Asset Value = (Value of Assets - Value of Liabilities) ÷ Total Share Outstanding

Note a denominator consisting of total shares outstanding; this is because companies often need to compare NAV per share for investment purposes.

  • The usage of this is mostly for mutual funds and unit investment trusts-UITs, especially the open-ended ones; it allows for issuing an unlimited number of shares. However, it is used in other sectors, such as Real Estate, oil, and reserve companies. 
  • Speaking of NAV in a mutual fund, issuance and redemption of shares are decided using NAV. If a person suddenly invests a fixed certain amount of money in the fund, his share in the fund is calculated using the present value of the NAV of the fund.
  • Even many oil and gas investors use these NAV models to project cash flows, estimate the weighted average cost of capital, and analyze different business segments.
  • It is also useful for mutual fund calculations. To find a mutual fund's NAV, take assets less its liabilities and divide by the total number of shares.

To understand the calculation, here is an example:

Suppose there is an investment company with securities and other assets worth $100 million and liabilities of $10 million; the investment company's value will be $90 million.

Since the value of net asset value  will change daily depending on assets and liabilities, Mutual funds and Unit Investment Trusts calculate their values every business day after the exchange closes.

Key Takeaways

  • Net Asset Value  is the net value of a company's assets minus liabilities.
  • It helps assess the value of companies and is often close to the book value.
  • NAV is calculated by dividing (Value of Assets - Value of Liabilities) by Total Shares Outstanding.
  • It is used in mutual funds, UITs, real estate, oil, and reserve companies.
  • Mutual funds calculate NAV daily for share transactions.

Net Asset Value and Mutual funds

We can observe that the calculation is very sensitive concerning assets and liabilities considered.

Hence, we need to follow the definition of Asset and Liability given below strictly:

1. Asset

A mutual fund's assets include the market value of the investments, cash reserves, cash equivalents, and other income.

These are included in various forms, such as a percentage of capital in the form of liquid assets and cash and other items like interest payments, dividends, etc.

2. Liability

The liabilities include outstanding payments, money owed to the lenders, and other fees owed to associated entities. 

Apart from these, mutual funds also have foreign liabilities, including shares for non-residents, pending payments to foreign conglomerates, and various sale proceeds that are yet to be ousted. 

It also includes various accrued expenses, including utilities, staff salaries, operating expenses, distribution, management, expenses, etc. Let us try to understand the role of net asset value in a fund's performance. 

The first and foremost statement is that net asset values and funds' future performance are not correlated. It merely illustrates how the underlying assets have performed in the previous years. 

There is a chance that the NAV is low for a fund, but it doesn't mean it will be a lucrative investment. We need to check its historical performance and its returns.

Hence, investors shouldn't make it a deciding parameter while choosing funds for investment. They should check the returns from their investments to make an informed decision. Net value is useful to understand how a fund performs every day. 

That is, investors need to compare the present and past values of funds to calculate their rating.

NAV Interpretation

Though it represents the share price, it doesn't change with the share price. It is updated and adjusted at the end of the day.

Now, as we value a fund using NAV, the price of the fund at which it can be bought is fixed; hence, the number of shares in the fund is changed, not the price. 

As we all know, per-share is slightly different from the share price, so it is proportional to the value of the securities in the fund.

Net asset value represents the per-share value. It's calculated as the fund's assets minus liabilities divided by outstanding shares. NAV reveals each share's intrinsic worth in the fund.

As mentioned above, the formula is as follows:

Net Asset Value = (Value of Assets - Value of Liabilities) ÷ Total Share Outstanding

This formula computes the fund's per-share value by subtracting the total liabilities from the total assets and then dividing this result by the number of outstanding shares.

Interpreting NAV involves recognizing it as the per-share value of the fund's assets. A higher NAV typically suggests a greater per-share worth, while a lower NAV implies a smaller share. 

Net asset value serves as a stable reference point for assessing the value of an investment fund and can guide investment decisions.

NAV in Decision-Making

The most common analysis error in NAV is people try to compare two mutual funds to understand which outperformed and which underperformed. Now, each fund will have a different set of companies. Each company's stock price might not indicate its growth potential. 

Assuming that the net asset value will give a direct idea of investments is not great. It shows absolute values, and there is no scope for direct comparison. 

To determine which fund performs better, we must look at various parameters. We must look at each fund’s performance history and the securities and benchmark the fund with an appropriate index.

Net asset value represents an investment fund’s total value but isn’t a direct tool for comparing investments. It varies due to factors beyond performance.

Consider your investment strategy, goals, and risk tolerance. Use NAV alongside returns, expenses, and risk assessment for a comprehensive evaluation.

The significance of net asset value and how to consider it when evaluating investment options follow these aspects: 

  • Absolute Values: NAV represents an investment fund’s total value but offers no basis for direct comparison between investments.
  • No Direct Comparison: NAV Alone doesn’t indicate if one investment is better. It can vary due to factors unrelated to performance.
  • Influencing Factors: Factors like market value changes, capital gains, dividends, and shares outstanding affect NAV, making comparisons complex.
  • Investment Strategy: Different strategies yield different NAVs; choose investments based on goals and risk tolerance.
  • Consider Performance Metrics: Use returns, expense ratios, and risk assessment alongside NAV for a well-rounded investment evaluation.

Advantages and Disadvantages Of NAV

Some of the advantages are:

  • It reduces the calculation complexity as all the assets are valued separately and added later.
  • It also provides a valuation after liquidation, hence providing maximum downside risk.
  • Since the calculation of assets is separate, this helps us understand the tangible assets and the risk of loan default.
  • It provides transparency into the value of a fund's underlying assets. Investors can see exactly what the fund owns, promoting trust and understanding.
  • It allows investors to assess the historical performance of a fund. By comparing NAV over different periods, investors can gauge how well the fund has performed and make informed investment decisions.
  • For mutual funds, NAV helps fund managers maintain liquidity. They can calculate it daily and ensure enough liquid assets to meet redemptions.
  • NAV serves as a basis for pricing fund shares, ensuring that investors buy and sell fairly and consistently.

On the contrary, the disadvantages are: 

The principles of accounting change from region to region, which changes the financial statements in the following ways:

  • It doesn't show the company's future earnings; it only depicts the current position of the company. 
  • A company's value can be very high if the assets are disposed-off item by item.
  • It is typically calculated once a day after the market closes. This means that it may not reflect real-time market conditions. This can lead to pricing that lags behind actual market values in rapidly changing markets.
  • It doesn't account for tax implications, such as capital gains taxes. Investors may need to understand their tax liability based solely on NAV.
  • In closed-end funds, the market price may deviate significantly from NAV. This can lead to investors buying shares at a premium or selling at a discount, which can impact their returns.
  • Net asset value  does not account for dividends or capital gains distributions, which are crucial components of an investor's total return.

Net Asset Value In Real Estate

It is one of the valuation indices of real estate investment trusts (REITs). It is an adjusted value reflecting the market values of real estate properties held by an investment corporation. 

Unlike tech companies, where intangible assets account for the vast majority of the asset values, in real estate, tangible assets account for the valuation; hence we use the net asset value model. 

  • The degree of premium/discount on individual investment unit prices relative to the per-unit value serves as a yardstick for assessment. 
  • The index is synonymous with the price-to-book ratio in which factors such as unrealized losses/gains of owned properties and brand values are reflected. 
  • It can be provided to investors as a share value, depending on the investment structure. The discount on REITs depends on the cap rates. The lower the cap rates, the higher the discount. 
  • Discount or premium also depends on the sector of real estate. Valuation multiples are also used apart from Modeling REITs. 

Some sectors that trade at a premium are healthcare, industrial parksdata centers, etc. The sectors that trade at discounts include malls, offices, hotels, etc. 

Factors Affecting Net Asset Value In Real Estate

Various parameters affect the net value of assets in real estate. So let us have a look at those.

1. Net Operating Income

NOI is the total revenue generated by a property minus its operating expenses. Since there is a change in the property-level change in supply and demand, there is an impact on renters' ability and willingness to pay for the property. 

This can be due to an increase in the number of properties nearby offering lower prices to the customers or the addition of new job opportunities nearby, leading to an increase in demand.

As we saw above, NOI is very price-sensitive; however, this isn't the case with this unless the changes remain steady/continue for a longer period. 

2. Capital Market Changes

Capital markets have the greatest impact on NAV. In real estate, annual property income only accounts for 10-20% of the total return; the remaining 80%-90% is driven by the "capped NOI" or the residual value of the property. 

Since the cap rate acts as a net operating income multiplies when supply or demand changes that affect entire asset classes become permanent, these changes impact implied growth and exit cap rates and therefore have the greatest impact on net asset values.

Valuations of REITs are one of the most challenging tasks in financial modeling. Let us have a look at challenges in net asset value:

  • The most important thing to consider is identifying/deriving cash flow, and improper derivation leads to a bad valuation.
  • Valuation of assets that don't generate income.
  • Finding a cap rate(rate of return) requires extensive market research.

Researched and authored by Punit Manjani | LinkedIn

Reviewed and Edited by Aditya Salunek I LinkedIn

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