Can we rely on Net Asset Value (NAV)?

Saturday, 16th May 2009 13:51 - by Boredmum

Net asset value (NAV) represents the assets that a company owns minus its liabilities. Can we really be dependent on this when we are looking at companies to invest in? We hear that a company may have a NAV which is in multiples to the current share price so we think it is a good investment. The reason I bring this up is to ask what those assets are really worth if the company gets into trouble and need to sell them off. Are they likely to reach that magical value? For example, let’s look at Woolworths (TIDM code: WLW). The last accounts (produced in September 2008) showed a NAV of around 16p per share on Woolworths. Considering the share price was trading around 7p, this seemed like good value. Within 2 months, the company went into administration and as more and more information filtered through, it didn’t look like any figure near the NAV could or would be reached. At first, I believed it to be okay - assets would be sold, debts would be paid and shareholders would receive the remaining pot divided amongst us. We were quite diligent in looking at values of certain parts of the business, we felt we knew their worth and even if they went for a little less we would still be provided for. But, unfortunately in a ‘fire sale’ environment, you get nothing like what it is worth being offered: o 2 Entertain: Woolworths held a 40% stake, we believed to hold a value of around £200million, and the figure reported was that. Around £40million was offered. o Bertram’s: The business bought for around £25million only 2 years previously was sold for £8million, with severe discounting of stock in order to sell everything quickly. o EUK: Lost all its contracts, so the business was deemed to have no value. Then there were the new debt figures being bandied around. The debt had suddenly increased 4-fold and the reports were stating that not everyone would receive what they were owed. The majority of information came through newspaper articles. The company had been suspended from the London Stock Exchange, and then de-listed as administration took place. Once de-listed, there is no onus for news updates in official form. So, it now looks like there was no shareholder value left. It does remain to be confirmed, but is likely given the reported information. This leads me to think...can we rely on NAV?