Net Asset Value (NAV)

Financial Dictionary -> Investing -> Net Asset Value (NAV)

Net Asset Value (NAV) refers to a company's assets and not so much to the value of its liabilities. Mutual funds and open-ended funds are some of the financial instruments bearing the closest relation to NAV, as their shares are registered with the U.S. Securities and Exchange Commission and are therefore cashed in at their asset value. In addition, NAV may be used to describe the book or equity value of a publicly traded company and, thus determines the scale of its investment-attractiveness. By the same token, the net asset value of a company may stand for the value of its total equity, or it could be divided by the number of shares possessed by its shareholders.

In its essence, NAV is a part of a vast array of accounting and record-keeping methods and activities used to control capital flow management on the global markets, which in its turn may involve purchases, mergers, partial or full acquisitions, gains and losses of a particular company or corporation, etc.

Here it should be mentioned that a company's net asset value isn't something constant, but fluctuates on weekly on monthly basis, depending on its market performance. It logically follows that there is no universally-accepted method of calculating an entity's NAV. Rather than that, crediting agencies and market watchdogs use a variety of criteria to determine the investment-worthiness of a company or corporation. For instance, the net asset value of all open-ended funds registered in the United States changes every day with the opening of the New York Stock Exchange, starting from the level they reached at the end of the previous session.

In open-ended funds, the net asset value of a collective investment scheme (for example, hedge fund or US mutual funds) is computed as the difference between the total value of the assets or the fund's portfolio and all accrued liabilities. The latter are fees payable to service providers and investment managers, money owed to lending institutions, and other liabilities.

NAV is also useful in estimating if the shares of a publicly traded company are an expensive or cheap investment instrument. In this case, NAV is compared to the current market capitalization of the company, i.e. the price at which the same company is valued on the market. There are several reasons for NAV to be below the market price. First, if a company is believed to have substantial growth projects by the investors, they might be prepared to pay more money for the business entity than for its NAV. Second, there may be a difference between the assets' current value and the financial statements' historical cost, used in the calculation of the net asset value. Third, some assets, for example good will, do not appear in the calculation of NAV as they are not always included on a balance sheet.

The main reason why the term NAV is most commonly used in relation to open-ended funds is because these shares are not traded between investors but are issued to each new investor in the fund. In addition, each open-ended fund has the right to redeem its shares at their net asset value, in case an investor decides to pull out.

From the abovementioned, it may be fairly assumed that the term NAV relates more to entities that have their shares and securities traded over the counter, rather than to ones listed at the stock exchanges.