Asset-Based Approach
The best way to find out what something is worth? Sell it. Short of that, analysts have to make educated guesses.
When trying to figure out the value of a company, several ways to calculate these estimates exist. The asset-based approach represents one common way.
The math involved can get complicated, but the concept is fairly simple. To figure out the how much a company is worth, add up the value of the assets owned by the firm.
There are limitations to this approach. Not every company can get boiled down to the sum of its assets. McDonald's is worth more than a bunch of real estate and a pile of hamburger meat. Its brand, its business process and other intangible benefits make it more valuable than the asset-based approach would imply.
For that reason, the asset-based method only makes sense in certain situations, such as holding companies or companies that are failing and headed for liquidation.
Related or Semi-related Video
Finance: What is Net Asset Value (NAV)?5 Views
finance a la shmoop what is net asset value or nav nav is how mutual fund
shares are valued or priced at the end of each trading day take a look at this
mutual fund right here it has fourteen hundred seventy shares of Google and [mutual funds document]
three hundred shares of Amazon and five hundred shares of IBM and while you get
the idea at the end of each day the ask prices in
the bid-ask spread ie the ask is the price at which somebody will sell these
shares are added up and yep totaled in this case there are a hundred fourteen
different names in the portfolio and seven million bucks in cash all of which
total eighty-two point three million dollars in value at the end of this day
well there are two million shares outstanding exactly at this moment so
the nav at today's close well it's eighty two point three million divided
by two million shares outstanding to get forty one dollars fifteen cents per
share that 4115 is the nav of the mutual fund and what happens when more
investors join by you know putting in cash well like let's say somebody
invests a million dollars at the end of today well then the fund goes from [money lining up in rows]
having seven million bucks in cash to having eight million bucks in cash and
that investor just bought 1 million / 4115 4 nav share self that mutual fund
company printed out of thin air an incremental twenty four thousand
three hundred one shares bringing its total the two million twenty four
thousand three hundred one the total value of the fund is now eighty three
point three million bucks up from yesterday's eighty two point three
million and the shares outstanding in the fund are now two million twenty four
thousand three hundred one and yeah the nav didn't change just the shares
outstanding and it's nav not not pronounced nav although it'd be kind of
a cool name for a mutual fund anything never like find where you're going nav [tiny red car on map]
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