What is NAV-based valuation?

For some companies, the value lies mainly in what they own rather than in the profits they earn each year. NAV-based valuation looks directly at those assets. This page explains how this method works, where it is used and its limits.

Quick answer

NAV-based valuation, or net asset value valuation, estimates a company's worth by taking the fair value of all its assets and subtracting all its liabilities. The result, divided by the number of shares, gives NAV per share. It is used mainly for asset-heavy businesses like real estate developers, investment and holding companies, REITs and InvITs, where asset values drive the business more than yearly profits.

Key takeaways

• NAV = fair value of assets minus liabilities.
• It suits asset-heavy and holding companies.
• Assets are often revalued to market or fair value.
• Shares may trade at a premium or discount to NAV.
• It is less useful for businesses driven by intangibles.

What is NAV-based valuation?

Net asset value is what would be left for shareholders if a company sold all its assets at fair value and paid off all its debts. The NAV-based approach treats this figure as the core measure of value.

It differs from book value. Book value uses figures from the balance sheet, which are often based on historical cost. The NAV method tries to use current market or fair values, such as today's value of land, buildings or investments.

How does it work?

For a real estate developer, analysts value each project, often by estimating future sales and costs and discounting them. For a holding company, listed stakes are valued at market price and unlisted ones at estimated fair value.

Where is the method used?

It is common for real estate companies, investment companies, holding companies and natural resource firms with large reserves. REITs and InvITs in India also report NAV based on independent valuations of their properties and infrastructure assets.

Mutual funds also publish a daily NAV, but that is simply the market value of the fund's holdings per unit, which is a related but separate use of the term.

Premiums and discounts to NAV

A company's share price may be above or below its NAV per share. A discount may reflect doubts about the asset values, poor governance, taxes on selling assets or cash not reaching shareholders. A premium may reflect strong management or growth expected beyond current assets.

Holding companies in India often trade at a sizeable discount to their NAV, which is linked to the holding company discount used in sum of the parts valuation.

What are the limits?

Fair values of assets like land or unlisted stakes involve estimates and can change quickly. The method also ignores the value of future growth and of intangibles like brands, technology or customer relationships.

So it suits businesses whose value is mostly in tangible or financial assets. For service or technology companies, earnings and cash flow methods are usually more relevant.

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