Asset Valuation
Candlefocus EditorAsset valuation is the process of determining the fair market value of an asset. This can be done through a variety of methods, each of which has its own advantages and disadvantages. An asset owner that properly values an asset gets a better understanding of its potential worth and can use this knowledge to make educated decisions on how to manage it in the best possible way.
Net Asset Value (NAV)
One of the most common methods used for asset valuation is the net asset value. It is the book value of all tangible assets held by a company, minus any intangible assets and liabilities. It is normally expressed as a per share figure and is calculated by subtracting the total liabilities from the total assets. For example, if a company has $500 million in assets and $200 million in liabilities its NAV would be $300 million divided by the total number of its shares outstanding ($300 divided by 5million shares would be $60 per share).
Absolute Value Models
Absolute value models are mathematical formulas used to value a particular asset. Unlike NAV, this method does not compare the asset to other assets of similar type. The most common absolute models include the discounted dividend model, discounted free cash flow model, discounted asset model and residential income model. Each of these models uses a different formula to calculate the value of the asset and all the necessary financial information needs to be taken into account, such as expected future earnings, cost of capital and possible sale proceeds.
Relative Valuation Ratios
The final asset valuation method is the relative valuation ratio. This method compares similar assets to each other to determine the value of an asset. This can be done through a variety of ratios, such as the price-to-earning (P/E) ratio and the price-to-sales (P/S) ratio. For example, if asset B is trading at $20 per share and has an earning per share (EPS) of $5, the P/E ratio would be 4. This means it is trading at 4 times its EPS. Similarly, if asset A is trading at $10 per share and has sales of $20, the P/S ratio would be 0.5. This means it is trading at 0.5 times its sales. By comparing assets, investors can compare their relative values and make better decisions on which assets to invest in.
In conclusion, asset valuation is an important process that helps owners better understand the potential worth of their assets and make better decisions on how to manage them. Valuation methods, such as NAV, absolute value models and relative valuation ratios, can all be used to help arrive at a fair market value. It is important to understand the different methods and how each of them works so one can make the best decision when assessing the value of an asset.