Net asset value, net worth and liquidation value

A company's net asset value (Net worth) is the fair value of equity and a firm's liquidation value is the equity remaining when assets and liabilities are valued at the sale price.

When calculating the net asset value of a company, you estimate the value the assets, provisions and liabilities in the balance sheet at fair value. The net asset value may be different from the presented value of the equity according to the annual report, this is due to the accounting standards applicable to the valuation of the items in an annual report. In the annual report are assets usually valued at cost less annual depreciations.

Net worth = assets - liabilities (valued at fair value)

Liquidation value is the value of a company when it is assumed that the company will shut down their operations. When you are calculating the liquidation value you have to find out what you would get in a sale of all assets. The liquidation value is the value that is left when all the assets have been sold, all the debts are paid off and all the exit costs have been taken.

Liquidation value = assets - liabilities (valued at realizable value)

If there are untaxed reserves in a company's balance sheet, then you have to split up the untaxed reserves in an equity part and a tax part, you usually use the term adjusted equity (AEQ) when consideration has been given to untaxed reserves in the calculation of equity. Untaxed reserves exists only in annual reports for individual companies, in consolidated financial statements are shareholders' equity already adjusted for untaxed reserves.

Adjusted equity = shareholders' equity + (1 - corporate tax rate) * untaxed reserves

Net asset value per share and liquidation value per share are calculated in the fundamental analysis to make it easier to assess how much a stock is undervalued. Net asset value per share and liquidation value per share is calculated by dividing the total value by the number of outstanding shares in the company.

P/AEQ is an important key figure in equity research and valuation. P/AEQ is the share price divided by adjusted equity per share. If P/AEQ is less than one, it means that the stock price is lower than the adjusted equity per share. The reason for a undervaluation may be because some companies trade at a discount because they provide a return on equity that is lower than the required rate of return from the shareholders. P/AEQ can be a good key figure if you want to find so-called cheap shares.

P/AEQ = share price / adjusted equity per share