Valuing Companies With NTA by:Julia Lee
There are many bargains on the market and one way that bargains can be identified is to use the net tangible assets (NTA) value.
Here I'll explain how you can use this measure to help you identify cheap assets listed on the sharemarket.
Net tangible assets
Net tangible assets measure what the company's assets are worth. It takes all the assets of the company minus liabilities and then removes the things that are difficult to value such as goodwill, patents and trademarks.
It is often referred to as book value or bankruptcy value.
Prices to book value
There are some companies at the moment which are trading below the book value. That means that the share price is worth less than net assets.
The prices to book (P/B) value measures the share price to the net tangible assets per share. Usually this number is greater than one, reflecting that the share price is worth more than what the net assets of the company are worth.
Recently, because of the dramatic downturn in the sharemarket you have markets discounting the value of assets. That means that they could be a potential bargain.
Benjamin Graham
This price to book ratio was a favourite of the father of value investing, Benjamin Graham.
Benjamin Graham's most famous student was Warren Buffet. Benjamin Graham was a fan of researching a stock and he accepted that any indicator was not perfect.
As a starting point he liked a P/B ratio below 1.5 for the defensive investor.
Choosing your stocks
But before you run out and buy stocks with a price to book value less than 1.5, you need to consider a number of factors:
There is the risk that assets may be revalued downwards. This is definitely not a situation that you want to occur.
Share prices are a reflection of future earnings. The assets may be cheap because the market anticipates a fall in earnings.
The company may be headed for potential bankruptcy. Definitely not a situation you want to be part of as a shareholder.
Despite this, a price to book value less than 1 could signal that the stock is trading too cheap. It means that the net assets per share are worth more than the share price.
Market opportunities
There are lots of these opportunities in the market at the moment. But be careful, it can also be a sign that the market believes that the stock is headed for bankruptcy.
A perfect example is TIM which, before going into voluntary administration, had a P/B value of 0.03.
More research
So the price to book value can signal a cheap asset but you'll still need to do your research to make sure that there is a strong viable business behind the assets.
After all, in the end, it's an increase in future earnings which propels share prices upwards.
Happy trading!
About the author
Julia Lee is an Equities Analyst for online share trading platform Bell Direct. Julia provides information on share trading and stock market research for frequent traders and investors.
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