What is Net Asset Value?

The Net Asset Value (NAV) is an important measure of a company’s overall performance at a certain point in time and is used by a variety of performance and investment funds. Read on to obtain a greater understanding.

Net Asset Value

What is Net Asset Value?
Net Asset Value or NAV is the total assets of an entity minus the total liabilities of an entity. NAV is often used in fund, investment and portfolio accounting. This net asset value can be different to the book value or the equity value.  Generally with fund accounting the NAV is calculated on a regular basis (up to hourly) in order to meet regular requirements. 

Relationship between NAV and ETF’s
Exchange traded fund’s which are registered on a share market are ideally value at the NAV. This means that the number of shares issued out on the market multiplied by the current share price (which is called the market capitalization) should equal the NAV.  However there are exceptions to this rule that are covered here

Calculating the NAV
Calculating the NAV is fairly easy for a listed entity that has to be transparent in its market disclosures. They are required to disclose their balance sheet that lists out the assets and liabilities and then sums the two in order to show a net asset value. This value changes significantly with investments that are recorded at fair value. Fair value being the value at that particular point in time and can change on a daily basis. 

For example if we say a investment fund has $12M in investments, $4M in cash and $3M in liabilities with 2 million shares on issue the NAV calculation is fairly straightforward. 

$10M + $4M  – $3M = $11M in NAV 

This can be further calculated on a per share record being $11M / 2M = $5.5 per share.  If you were to calculate this same NAV value on the same fund a day later it may actually be significantly different to the $11M in NAV the day before. There are so many numbers moving around on investment funds, that people are employed full time just to calculate the NAV values. A computer completes this however a full time staff member manages the reconciliation process. 

You can begin to see why the NAV is very important and for funds, they want to see this number continue to increase on a regular basis and not decrease. 

There are of course limitations of using the NAV to assess a company’s performance and that is looking at the performance the returns of the entity may be better than looking at the number of assets the entity is holding. They could be holding $100M in net assets, but continually making losses. Therefore there are absolutely limitations however the NAV is still a useful value.  

If you want further information on NAV, then there is more detail on the broader subject of generation of passive income through ETF’s.

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