Net Asset Value Method of Valuation
NAV is only as good as the value put on each line, and it is not an automatic floor.
The net asset value (NAV) method values equity as assets minus liabilities. It sits under the cost approach in the Phase 6 SFA syllabus, alongside book value, adjusted value, sum of the parts and replacement cost.
The method is only as good as the values put on each line. Book NAV takes the balance sheet as it stands; adjusted NAV restates assets and liabilities to current values; liquidation NAV asks what the assets would realise if the business stopped. The exam tests which version fits which situation.
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How the Valuation Examination Tests This
Case studies give a balance sheet plus notes (a property revaluation, a market value for investments, a disputed claim) and ask for adjusted NAV per share. The traps: forgetting to deduct preference capital, missing a note that asks for tax on the revaluation surplus, using book value for listed investments, and using the wrong share count when the case says convertible instruments are to be treated as converted.
FAQs
What is the net asset value method of valuation of shares?expand_more
It values equity as total assets minus total liabilities, usually after restating assets and liabilities to current values, and divides by the number of equity shares.
When is the NAV method used?expand_more
Mainly for investment and holding companies, asset-heavy businesses, companies with large non-operating assets, and businesses under a liquidation premise. For profitable operating companies it is normally a cross-check.
What is the difference between book NAV and adjusted NAV?expand_more
Book NAV uses balance-sheet carrying amounts. Adjusted NAV restates each asset and liability to its current value, such as market value for listed shares and a fresh valuation for land.
Are redeemable preference shares deducted in NAV?expand_more
Yes. ICAI VS 301 treats redeemable preference shares as part of debt in the capital structure, so they are deducted before arriving at equity value.
Next steps
- DCF valuationarrow_forward
- Bases of Valuearrow_forward
- Bonds and preferencearrow_forward
- SFA mock testarrow_forward
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