Net Tangible Assets

[Sgt Pepper]

How important is NTA when assessing a share?

[Ferg]

It's one of many factors I look at and one of the lesser important ones. BUT it will depend on what you are investing in and why you are looking at it.

For me the NTA per share sets a floor price - any SP below that is often a good buy BUT that is on the assumption the business is profitable. A profitable business will continue to grow equity (assuming dividends < comprehensive profit) and on the assumption that is not achieved by issuing new shares ==> then the NTA per share will increase. However a business that makes losses and/or adds more shares at a faster rate than the growth in equity means the NTA per share will reduce.

Whilst something may appear cheap relative to NTA, this might be because the market has already priced in further erosion of equity or dilution of NTA per share or maybe the return on assets achieved by Directors & Management is worse than say a term deposit (in other words the risk does not warrant the return).

NTA is very useful when looking at managed funds, unit trusts or property trusts. IMO one shouldn't pay too large a premium over the NTA for these sorts of entities.

On the other hand a share price over NTA is being valued on some other basis - either something like a multiple of future earnings or discounted future cash flows or maybe even using hopium.

But coming back to my original sentence, it is one of many factors I look at. However, it usually carries little weight unless it should be used for the type of entity being invested in as noted above, or if there is some other issue where it can be used as a trump card to say "no" (e.g. negative NTA in a new IPO). Sometimes it is simply a "nice to know" and forms little part of my investment decision process.

[Dassets]

Without endorsing NTA one way or the other I would point out to dilute for non-listed options etc esp if in the money

[Doug]

For me the NTA per share sets a floor price

Huh? I would have said the ideal company has NO tangible assets (and no debt). IMO unless a company is in the business of acquiring tangible assets NTA is irrelevant and EPS is everything.

[Snoopy]

Huh? I would have said the ideal company has NO tangible assets (and no debt). IMO unless a company is in the business of acquiring tangible assets NTA is irrelevant and EPS is everything.

In one sense I agree with Doug here. If go you back into any business history, how did cash (a tangible asset) become an intangible asset down the track? At the time the 'intangible asset' was purchased, it must have been churning out a lot of cash. Otherwise our company who 'bought it', would not have paid the money they did to own it. Of course, just because a business unit was good at the time of purchase, is no guarantee that it will continue to be good. The intangible asset, valued at the time of the business unit purchase at a 'fixed intangible value', may no longer be worth the value it is held at on the books of the acquisitor. But OTOH if that business unit continues to perform and our parent company spends all of its cash on purchasing business units that create intangible assets on the balance sheet of the parent, then this would indicate that out parent business is acquiring external business with very high rates of return on the assets involved. From a parent acquisitor shareholder perspective, this is a good thing.

The other way of looking at this is when the tangible asset on the books has collateral value to other people (like banks financing expansion plans). If a company owns land, for example, then it can effectively strengthen its balance sheet by stealth. As on the book tangible assets increase in value, more money can be borrowed against them. This, as I understand it, was how the retailer Smiths City Group used to operate. They used their equity in their valuable central city Columbo St site, to finance the design build and selloff to property investors, their growing nationwide network of shops. It was when, at the suggestion of some clever accountant, they 'optimised their capital efficiency' by selling off their crown jewel of net tangible asset - the Columbo St land and building. Following that, they had to finance their expansion from business profits. Then when the retail business took a downturn, the group collapsed. In this sense, having good 'net tangible assets' on the books can be an insurance policy against tough business times.

SNOOPY

[shareman]

NTA isnt everything but it is a useful guide about a companies value

[LaserEyeKiwi]

NTA at least sets some sort of value on a ballpark amount which would be possible in a hypothetical liquidation of a company. Of course the reality would be how easy those particular assets would be too liquidate, but that can generally be evaluated easily. Cash & cash equivalents obviously are near instant at full face value. Land and buildings may take longer to sell, but valuation is fairly easy to estimate. More specialized assets (machinery etc) tougher to estimate.

Most companies should be valued on long term earnings potential at an appropriate valuation multiple, but it happens fairly often that you see a company with a very odd discount to NTA and on almost every one of those occasions the value is subsequently realized (either the stock price rises naturally, or a corporate action is taken to take advantage of the valuation mismatch)

[iceman]

Interesting discussion and good posts. But like some have said already NTA is only a part of the puzzle. You can have assets on the balance sheet that may not be fairly valued and producing a lot of cash and other assets that are valued highly but produce little or no cash.
I look at SAN for example that incredibly (in my view) has been selling valuable assets in the last 2-3 years and this week indicated they're considering selling more, to improve cashflow. That's a perfect reason for me to stay away from them and companies that sell good assets to make the short term cash gains. But it improves their NTA !

[Sgt Pepper]

One reason that prompted my question was Millennium Copthorne Hotels (MCK) which has (or had) share price of $2.35 but an NTA of around $4.60

[Sideshow Bob]

One reason that prompted my question was Millennium Copthorne Hotels (MCK) which has (or had) share price of $2.35 but an NTA of around $4.60

There are a few companies where they seem like a bargain, such as CDL and major shareholder MCK, where NTA is well north of the share price. With these companies, they have a major strategic long-term shareholder that can't really taken out by a takeover. And seemingly no plan to realise that tangible asset or have it necessarily reflected in the share price. Or are they just held back by their profitability - EPS?

Can also question the actual value of those assets, and on what basis they are valued. For example, USX:SFF assets are well in excess of share price (maybe $3+ from memory vs $1.31). But what is a freezing works actually worth if tried to sell it?

Didn't Buffet try to always buy $1 worth of assets, for well less than this (and with a margin of safety).