Net Tangible Assets per share (NTA/share)
NTA (net tangible assets) is described as the total assets of a company, excluding intangible
assets (such as goodwill, trademarks and patents) minus total liabilities. As outlined in Direct Broking's
free DIY Brochure, the NTA/share value is used to determine, in theory, the money
that each shareholder would receive if the company was forced into liquidation and
all of the assets were sold at that point in time.
[Formula:NTA = total assets - total liabilities - intangible assets]
[Formula:NTA/share = net tangible assets ÷ number of shares on issue]
This article will assist you in calculating, understanding and using a "Net Tangible
Assets per share" (NTA/share) figure in your company analysis. NTA/share is relevant
because it helps you judge whether a share price is over or under valued.
HOW IT HELPS YOU
When you put your investment plan together, ask yourself questions about the companies
you want to invest in, based on your chosen investment strategy.
- Is this a fair price for the shares (maybe the company is undervalued or overvalued)?
- What is my worst case scenario in this investment?
- What are my triggers for selling out?
The NTA/share is a useful ratio for your investment strategy as it can help you
to answer these questions.
An NTA/share figure may indicate:
- Whether the share price accurately reflects the net assets held by the company
- The amount of money (per share) that you may get back if the company was liquidated
- The time you might exit the investment
As a result, NTA/share applies to three investment strategies outlined in Direct
Broking's free DIY Brochure.
WHERE TO FIND IT
Finding NTA/share on the Direct Broking website is easy. You can obtain an NTA/share
figure in the "Detailed" Quick Quote menu, as demonstrated below*. This data is
taken from the reported data in the financial statements of the company.
*The figures reflected in the example above are correct as at March 11th 2009.
IMPORTANT POINTS TO NOTE
Please be aware that NTA/share should not be used to compare companies in different
industries (e.g. mining versus ports) as they provide different
products/services.
NTA/share is useful but should not be used exclusively, even when looking at two
similar companies, as it does not take into account intangible assets. Even though they are excluded from the formula above, intangible assets can still add
value to share prices as intangible assets can have a positive effect on profit levels, which in turn may also affect the NTA/share figure.
For example, a company with a high level of "goodwill" (a better brand reputation)
amongst its customers may have a higher share price and NTA/share than its rival,
simply due to the fact that customers trust the brand of the first company more
than they trust the brand of the second. In this fictional scenario, customers may
be more likley to purchase good/services from
the first company as opposed to the second company and this may lead to higher profit
and share price levels, and a subsequently higher NTA/share figure, for the first
company.
CASE STUDIES
1. NTA/share - "Undervalued Buy & Hold Strategy"
 |
Some investors choose to ignore short-term downward cycles in the market that can
cause anxiety and stress. In fact rather than selling, they may see a drop in the
market as a buying opportunity, accumulating good securities at cheaper prices.
One way of identifying potentially cheaper stocks is to identify where the NTA/share
is greater than the share price. This means that the share price is significantly
lower than the book value of the shares and the shares can be considered undervalued
(considered a "bargain"). |
|
Company ABC |
Company DEF |
|
Share price: $0.60 |
Share price: $3.50 |
|
NTA/share: $2.20 |
NTA/share: $0.40 |
|
The NTA/share value for fictional company "ABC" shares is nearly 4 times the amount of the share price,
indicating that the shares are undervalued. This may lead some investors
to the conclusion that because the net assets held by "ABC"
are greater than the
share price, it carries the resources to strengthen its position within the market
over time, thereby increasing its share price. Buying at a "cheaper" price before
other investors realise the potential of the company could be an advantage. |
2. NTA/share - worst case scenario
|
In the current economic climate where weaker companies are succumbing to mounting
debt, the NTA/share value is a useful tool to envisage the worst case scenario that
some investors are forced to experience - how much money will they receive if the
company goes under? A company with a high NTA/share may be able to, theoretically,
provide better recuperation on the value of an investor's shares.
Whereas a company with a low NTA/share may, theoretically, provide significantly
less recuperation
on the value of an investor's shares. |
|
Company ABC |
Company DEF |
|
Share price: $0.60 |
Share price: $3.50 |
|
NTA/share: $2.20 |
NTA/share: $0.40 |
|
Using the same (fictional) companies as examples again, if "ABC" was liquidated
it could, theoretically, provide more than a 100% recuperation on the cost of an investor's
shares, based on the current share price. Whereas "DEF" investors would, theoretically,
only receive $0.40 worth of their $3.50 shares.
Note: in the event of a company
liquidation shareholders are paid out last. Shareholders, as owners of the business,
rank behind secured and unsecured creditors when proceeds from realised assets are distributed to creditors in the
event of a liquidation. This means that an NTA/share figure should only be viewed
as an approximation of the amount a shareholder might recuperate on their investment. |
3. NTA/share - your exit strategy
|
A wise investor makes decisions on why they might sell at the start of their investment
and does not allow fluctuations of the market to make decisions for them.
A reduction in the NTA/share value may be one sell trigger the investor looks at,
as it indicates that the share price is higher than the book value
of the shares. This means either the book value has deteriorated and liabilities
are increasing, or more shares are on issue. Either way the shares are overvalued
(considered "too expensive").
Alternativley, investors may be of the opinion that when a stock price increases
rapidly and ends up exceeding the NTA/share figure, a pullback may occur - "what goes up must come down". This may be a good time to realise some or all
of the profit from your shareholding.
Being able to recognise that a company has a (possible) downfall in its future and
subsequently taking measures to reduce a holding in that company, is the mark of
a smart investor who is sticking to their investment plan and knows when to say
when. |
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