Net asset value method represents the value of company’s assets minus liabilities. It measures the worth of the company.
Being a straight forward method, the value of shares of target company is computed in terms of net assets acquired. This method of valuation is not based on income generation rather than on income generating assets.
The net asset value method is most simplest method also called ‘Book Value’ Method computes the value of the shares of the company as follows:
Net Fixed Asset = Fixed Assets + Net Current Assets – Long Term Debt
Though this method has the advantage of being simplest as it uses historical costs which are easily available, but it has little relevance as Balance Sheet is not a valuation device. Therefore, this method offers a lower limit to value the shares of target company.
Further this method ignores the current asset valuation even for intangible assets such as Brand, Intellectual Property Rights etc.
Net asset value formula
Net Asset Value = Assets – Liabilities / Total number of outstanding shares
