What's the net asset value?
- Net asset value (NAV) is from the balance sheet and is asset less liabilities. The break up value of the company. A share will typically trade above this value as we're buying future profits, not break up value.
- Tangible NAV (TNAV) is better as this excludes things such as goodwill, so is a real number of actual assets. Goodwill is when you buy a business and pay more than the NAV for the business, rest is goodwill. When things are going well and booming goodwill is not an issue. But when things turn, well it is messy and we've seen lots of goodwill write downs in years past.
EOH (JSE code: EOH) states NAV of some R4.5billion. But R3.3billion is goodwill and so not really an asset and with EOH struggling for goodwill right now not really anything to write home about. So TNAV of some R1.1billion meaning EOH trading at more than double NAV while AdaptIT (JSE code: ADI) is trading below TNAV. So all the talk of EOH being below NAV and hence a great value is bogus.
Most recently Woolies* (JSE code: WHL) wrote off a third of the cost of the David Jones acquisition.
Now when goodwill is written down it hurts profits but the company will tell you this is not an issue as it is a non-cash charge. Correct, but of course it was cash (or script) when you paid for it.
As a rule, buying at or even below NAV (or even better TNAV) is a great strategy - except it is fraught with issues.
I was all over The Don Group as they traded below TNAV and that TNAV was buildings they owned in places like Sandton and Rosebank. But by the time they were done the TNAV had collapsed.
This is a critical point of any for of NAV.
- How real is it? Who and when was it last valued and can the value be realised?
- What is the market saying about this TNAV? A stock below TNAV is often the market saying TNAV is under threat, especially if it is cash.
ELB Group saw their TNAV collapse even as it was mostly cash, but a disaster of a contract saw them burn cash and now cash has gone and TNAV has collapsed as has the share price.
NAV, and especially TNAV is important, but it is not written in stone. So as with all numbers, we need to be careful of it. Discount to NAV/TNAV is not a buying reason. In fact no single metric is ever a reason for buying. We need a preponderance of evidence. https://justonelap.com/finding-long-term-investment-winners/
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