What it means
The calculation is deliberately simple. Take total assets, subtract total liabilities to get net assets, then divide by the shares outstanding.
The result is expressed as a dollar amount per share, and it is often called net asset value per share or book value per share depending on the industry. It matters most where the assets themselves are the business.
Investment trusts, property companies, insurers, holding companies and shipping firms all own portfolios of identifiable, valuable things, so the balance sheet is a reasonable proxy for what the company is worth. In those sectors a share trading well below asset value per share is a signal worth investigating.
The measure is far less useful where value comes from things the accounts do not record. A consultancy, a consumer brand or a software business derives most of its worth from people, reputation and code, and much of that never appears as an asset, so asset value per share will look absurdly low next to the share price.
Applying the ratio outside asset-heavy sectors produces misleading conclusions. Several practical adjustments are common.
Analysts often strip out goodwill and other intangibles to get a tangible asset value per share, deduct any preference shares that rank ahead of ordinary shareholders, and use the diluted share count if options or convertibles are likely to be exercised. Each adjustment makes the figure more conservative and more comparable.
The biggest limitation is that book values are historic. Property carried at a 1990s cost, inventory that will never sell at full price, or receivables from a customer in trouble all inflate the number, while land bought cheaply decades ago understates it.
Anyone using asset value per share seriously has to ask when each major asset was last valued and on what basis.
In practice
Real-world examples.
Example
A listed investment trust publishes a net asset value per share of $4.20 while the shares trade at $3.57, a discount of 15%. The board announces a buyback, because repurchasing shares below asset value increases the asset value per share for everyone who stays. The discount narrows over the following quarter.
Example
A property company with net assets of $180,000,000 and 40,000,000 shares reports $4.50 per share. Following an independent revaluation of its retail portfolio, the figure falls to $3.90 without a single building being sold. The share price reacts to the revaluation rather than to any change in rent collected.
Example
A general insurer is assessed by an acquirer on tangible asset value per share rather than earnings, because reserves and the investment portfolio drive its worth. Goodwill from an earlier acquisition is stripped out of the calculation. The bid is pitched at a small premium to the adjusted figure.
Formula
Calculation
Asset Value Per Share = (Total Assets - Total Liabilities) / Shares Outstanding
Kestrel Property Group reports total assets of $620,000,000 and total liabilities of $170,000,000, and has 30,000,000 ordinary shares in issue.
Net assets = $620,000,000 - $170,000,000 = $450,000,000.
Asset value per share = $450,000,000 / 30,000,000 = $15.00.
The shares trade at $12.00. The discount to asset value is $15.00 - $12.00 = $3.00, which is $3.00 / $15.00 = 20% below the balance sheet value of the underlying property. An investor now has a specific question to answer: is the 20% discount justified by property valuations that are out of date, by high management costs, or is it an opportunity?Case study
Seen in the real world.
Kelvin Wharf Estates is an illustrative, fictional listed property company created to show the ratio in use. It held total assets of $340,000,000 against liabilities of $190,000,000, giving net assets of $150,000,000, and with 25,000,000 shares in issue its asset value per share was $6.00.
The shares had drifted to $4.20, a 30% discount to that figure, and the board assumed the market was simply pessimistic. A closer look showed something more specific: two office buildings had not been independently valued for four years, and comparable local transactions had been completed at meaningfully lower prices.
After a fresh external valuation cut those buildings, the reported asset value per share fell towards where the market had already priced the shares. The lesson in this illustrative case is that a discount to asset value per share is a question rather than an answer, because it may reflect a stale balance sheet rather than a bargain.
Watch out
Common mistakes.
- Applying asset value per share to service or technology companies, where the most valuable resources are never recorded on the balance sheet and the ratio is meaningless.
- Forgetting to deduct preference shares and other claims that rank ahead of ordinary shareholders, which overstates the value attributable to each ordinary share.
- Treating a discount to asset value as automatic proof of a bargain, when it often reflects out-of-date valuations, poor governance or assets that cannot be sold at carrying value.
Questions
People also ask.
Is asset value per share the same as book value per share?
In practice the terms are used interchangeably, though asset value per share is more common where assets are regularly revalued, such as property and investment funds.
Should intangibles be included?
Many analysts exclude goodwill and other intangibles to produce a tangible figure, because those balances often cannot be sold separately and are the first thing written down when trading weakens.
Which share count should be used?
Use shares actually in issue for the basic figure, and the diluted count including options and convertibles when assessing what an incoming investor would really own.
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