Using fundamentals to identify value opportunities – asset-based investing

In the introduction to this article series, I explained that value investing is about identifying differences between a business’s fundamental value and the market price offered to own shares in it. The simplest way to view that fundamental value is by analysing the balance sheet, particularly a business’s Net Asset Value.

Asset-based investing

Net Asset Value (NAV) is also known as Book Value. For example, on the Stockopedia StockReport:

Or Total Equity in a set of accounts:

NAV is calculated by taking the total assets on a company’s balance sheet and subtracting the total liabilities. It can be thought of as what the company believes it would receive if it sold off all its assets and paid off its liabilities.

Net Asset Value (or Book Value or Total Equity) = Total Assets – Total Liabilities

Unfortunately, it is doubtful that shareholders would receive such value in a liquidation situation. Book value also includes the value of intangible assets, such as goodwill (which arises when a company acquires another company for more than its book value) or capitalised development expenditure. Although sometimes very valuable to the company,...