Financially, anything owned by an individual, a company or any entity is an asset with a monetary value which is convertible to cash. Liabilities are any claims or debts in which an organization or a person is required to pay legally. The net asset value (NAV) is a value that is left when the liabilities are taken away from assets. A positive value of the party is considered as solvent. A negative value is considered as insolvent.
The net asset value is often associated with mutual funds. The formula for net asset value mutual funds are the following:
Market value securities of the fund + assets and cash – total liabilities of funds / number of outstanding shares.
Each end of the business day, net asset value are calculated and referred as net asset value per share. The mutual fund’s net asset value is changing daily because of market fluctuations affecting the investments of funds.
Calculating the liabilities of a particular corporation is sometimes complicated. In addition to mortgages, operating debt and loans, a company should include any unpaid taxes and deferred stock dividends which are due within a year. Unemployment tax, withholding tax, personal property taxes, and real estate tax are all needed to be considered.
The net asset value of a company, also called as shareholder’s value or book value, doesn’t necessarily be equated with the viable sales price. Net asset value only considers assets that are tangible, not intangible assets like goodwill determining potential future earnings. A company holding a patent which promises to increase the revenues significantly, this will justify sales price that are higher than the book value. If the demand in market for the product of the company is decreasing, the company might sell it less than it net asset value.
Calculations of net worth are important for non-profit organizations. Charities don’t exist to have a profit but if a certain organization plans to grow, it is necessary to have a positive net asset value. Large donors and other foundations often review the budgets of charities and balance sheets before making any donations and grants. It is necessary to do this to ensure that the organization is capable of fulfilling its purpose and that it remains solvent.
Normally, net asset value is not applied to properties like rental real estate but it is also used by analysts in evaluating real estate investment trusts (REIT) shares. These are the public companies selling stocks to investors. Its main business is buying and then managing income producing real estate like apartment buildings, hotels, office complexes and shopping centers. In the form of dividends, the profits are then distributed to the owners of the stocks. To determine an accurate evaluation, calculations of the REIT’s net asset value use the market value of its properties rather than in depreciated basis.