NTA and NAV

[Snoopy]

Thanks for that. So that NTA is the more important one to consider if looking to buy?

I think of NTA as a proxy for downside risk. It answers the question:

"If everything turns to custard, what is the likely price that a company receiver might get if all the assets were sold and the debt was repaid?"

Nevertheless, it isn't quite that simple. If a company is in a specialised industry, for example, they may have a lot of specialised equipment for which they have paid cash. These would be recorded as 'tangible assets'. But in a fire sale there may not be a buyer for these assets. Or maybe there will be a buyer, but they will offer a price well below book value. So in a case like this, to use NTA as a proxy for risk might be misleading.

OTOH, the reason why an acquiring company might pay more than 'book value' for an asset (and hence create an intangible asset on the acquirer's books) is that they expect to earn well above average profits in the future from these assets. IOW the business unit just bought is inherently very good. In accounting practice, it used to be the rule that intangible assets were automatically depreciated over a lengthy time period. However, a few years ago this convention was changed so that intangible assets (but not software) now have an indefinite life. If a company with intangible assets gets into trouble, it would not be uncommon to write down any intangible assets (and maybe some tangible assets) 'on the books' to some extent. But instead it might be a well performing division of the company in trouble is sold off to 'balance the books' at a premium to the intangible asset value recorded. So it isn't automatic that an intangible asset is of lower quality than a tangible asset.

SNOOPY