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Net Tangible Asset Value

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Net Tangible Asset Value

Net Tangible Asset Value: In the balance sheet of most companies or businesses, the business’s net assets are presented. However, the value of the company’s net assets stated there is not the business value representative.

The cost basis of accounting is what most companies use to prepare their balance sheet. That is, where the information regarding the assets and liabilities of a company are recorded at their historical acquisition and purchase as against the market commanding value of the assets in a sale as when stated. An asset approach is used to find the value of net tangible assets.

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What is the Asset Approach?

The asset approach is one of the approaches to knowing the value of a business. It is among the standard three. Others are the market and income approach. An asset approach is an approach to understanding the value of a company where the balance sheet market value is used to determine equity value.

The Adjusted net asset method is the method that is used in the asset approach. It values a business based on the difference between its asset fair market value and the fair market value of its liabilities. Through this method, analysts can establish a floor value of a business based on the amount that will come after the company’s assets are sold and its liabilities satisfaction.

Adjustments are made under the adjusted net asset method

They include:

Real Personal Property

The book value of a business personal property such as furniture, vehicles, and fixtures or real property such as building, land, and land improvements does not always reflect fair market value. As a result, an expert appraisal from a third party is engaged to help find out the tangible assets’ market value.

Related party or receivables payables

It’s necessary to consider if a receivable is payable or wholly collectible is meant to be paid in full. There are cases common to related parties like an intercompany receivable or a shareholder loan. Discuss every critical account with the company’s management to know if an adjustment is meant to account for future uncollected payable or receivables that are not made.

Unrecorded Assets and Liabilities

It is paramount to check what not having liabilities or assets recorded would cause. An example of such an unrecorded asset or liability is potential legal judgments and settlements.

Goodwill and Intangible Assets

Under the adjusted net asset method, intangible assets such as goodwill are usually written down to zero value. This is so because the value of such assets is best valued either by the market valuation approach or the income valuation. If these assets are stated on the company’s balance sheet but do not generate returns, it may question the assets. Thus, a warranty of further consideration is inevitable.

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Valuation of Net Tangible Assets (NTA)

Net Tangible Asset (NTA) is the sum of all assets minus all liabilities. A company balance sheet’s total assets include physical and intangible assets. Intangible assets include goodwill, trademarks, and copyrights. A company’s total liabilities may be discovered on its balance sheet, including current and long-term obligations.

Net Tangible Assets Example (NTA)

For instance, the entire assets valuation of the business of Company A is $1 million, the total liabilities are $500,000, and the intangible assets are $200,000, as reported. The NTA may be calculated by:

$1 million minus $200,000 minus $500,000 equals $300,000 in net tuition and fees. It is vital to know how much NTA you have because:

Managers may estimate their total business asset valuation using NTA without considering intangible assets. In essence, NTAs do not include intangible assets that are difficult to evaluate. To get purchase finance, a firm with a high NTA has more assets to put up as collateral.

A company’s solvency and liquidity may be assessed using NTA through the business valuation steps. While calculating a company’s premise of value business valuation in terms of NTA has certain advantages and disadvantages, its applicability varies widely depending on the industry. Intangible assets, such as patents, are frequently more valuable than tangible assets in the medical device industry. On the other hand, real estate holding firms have little to no tangible assets.

Net Tangible Assets: Benefits and Drawbacks

Tangible assets are significant for a business because they enable the management team to evaluate its asset position without considering old-fashioned or difficult-to-value intangibles. Net tangible assets are often more precise when calculating a company’s return on assets (ROA).

On the other hand, deriving net tangible assets is valuable in various businesses. For example, there is a large concentration of intangible assets in the medical device industry. A company’s P/B (price to book) business valuation discount rate ratio may be used to compare it to other firms to see how they’re doing.

Pros

Asset position may be assessed without taking into account intangible assets.

Cons

Even in businesses with high intangible asset values, usefulness may vary widely.

Comparing Net Tangible Assets to Net Tangible Assets Per Share

Instead of calculating net tangible assets as a whole, some corporations calculate the value of their net tangible assets per share. Divide a company’s net tangible assets by the number of outstanding common shares to arrive at its net tangible asset per share of common stock. A company’s net tangible asset value per share is $2 if it has $1 million in net tangible assets and has 500,000 outstanding shares.

When comparing firms in the same sector, this value might be helpful. Net tangible assets per share may be pretty high for automakers, while net tangible assets per share can be very low for a software business with significant intangible asset levels. As a result, this metric should only be used when comparing organizations from the same industry.

Net Tangible Assets Per Share

Shares or bonds may be used to represent net physical assets. Since there are 1,000 outstanding common shares, the corporation has $45 in net tangible assets per share with $45,000 in net tangible assets. In the same way, if a company has ten outstanding bonds, its net tangible assets per bond are $4,500.

Final Thought

Though you can use the adjusted net asset method to find the value of any business, it is best to use it when there is a continuous generation of business losses and for capital-intensive and holding companies.