Asset-Based Approach
Candlefocus EditorThe amount of value a firm can receive through an asset-based approach can be different from other methods. This is because the asset-based method tends to ignore the future size, direction, and level of profitability that a company can reach depending on how it uses its assets. Instead, it only takes into account up-to-date values. With this approach, the company is worth the sum of the value of its net assets, minus liabilities.
The calculation of a company's net asset value is relatively simple. First, a firm takes its total assets, subtracts liabilities such as debt and any other necessary expenses and the resulting value is called its net asset value. This can be seen as the company’s actual worth.
Many investors prefer to look at companies through an asset-based approach. It offers them an assessment of whether they are getting a good deal or overpaying. Companies can also use this method as an internal reference point to gauge their performance and can easily track their progress by comparing the current market value of the assets to their true book value.
However, like other methods, an asset-based approach has its limitations. It often fails to take into account the intangible elements that are key characteristics of many companies. These aspects include the talent, drive and experience of the company’s staff, the intangible assets (intellectual property, trademarks and so on) and the company’s competitive strengths. Additionally, the market value of assets may not match their book value.
Asset-based approaches are a useful tool for investors and businesses alike. By being able to determine the actual worth of a company based on its net assets, firms can make sure that their decisions are well informed. Furthermore, customers can use this approach to make sure the price they are paying is fair. With an asset-based approach, investors and firms alike can find out if their purchase is based on the company's actual value and not just on their hopes of future success.