Net Tangible Assets (NTA)

Submitted by Jim Thesiger on 25 September, 2010 - 23:23

The net value of a company is represented by asset backing or Net Tangible Assets (NTA). To find the Net Tangible Assets, all you need to do is divide the estimated value of a company (deducting liability from total asset) by the number of stocks that are on issue.

A possible measure of the value of a particular stock can be the “net tangible asset backing per ordinary share” (something also known NTA). However, it is to be mentioned that the effectiveness of this particular measure is subject to some reservations. The market value of a stock can be compared with it.

In case of an ongoing company, various measures linked with the income may turn out to be more relevant since the investors usually do not have access to the asset backing of the stocks until the company makes a capital return or faces liquidation. The shareholders may also have access to it if a takeover bid is made by another party which reflects this backing and gets accepted.

Book Value of Assets

Usually, the assets of a company are considered more valuable on the basis of “going concern”. However, in crisis times or during a time when a company faces bankruptcy, there is a good possibility that the book value of the assets may appear way too high. Under those circumstances, these values may appear unreliable considering the possible fire sale conditions that may prevail.

It is to be mentioned that if the assets of a company are not evaluated recently to allow for the replacement costs as well as for inflation, then in such cases the book values may turn out to be extremely low instead of being too high.

Calculating the Per Share Figure

The “per share” figure can be calculated by dividing the adjusted total net assets (subtracting intangibles from the gross assets) by the total number of ordinary stocks that are on issue. This method is appropriate for the calculation in cases where only one class of ordinary shares is available. It is to be mentioned that the intangible assets of a company may include its goodwill, trademark and patents.

If the NTA is low in comparison with the issue price of the shares in float then it can be considered as a prima facie indication that the promoters were too greedy, at the cost of the subscribers to the issue. And when new shares get listed, these investors can get exposed to possible loss because of this.

Glossary List

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