Net Asset Value (NAV) – How does it impact on share price?
At the time of investment, the investors look at the companies’ financial condition and funds to secure and profitable investment. Among all other technical terms for determining financial condition and strength, NAV is a necessary term. It helps track the worth of the investment when the market changes. The newbies are in great confusion to understand the total concept of NAV clearly. Even some of the expert and experienced investors are in confusion with it. Mostly it makes more confusion when it is discussed with another unit price like share price. This article will explain the relationships, differences between NAV and share price to clear the confusion with these commonly used terms.
What is Net Asset Value?
NAV is the short form of Net Asset Value. From the name, its definition comes out. It refers to a business product or unit’s net value at a certain period by representing per share or unit price. Different funds like mutual funds, exchange-traded funds, and closed-end funds are significant fields that discuss and need calculation of Net Asset Value. NAV is the difference between the value of the company assets and company liabilities. The difference between assets and liabilities is also known as net assets or capital of the company. It represents per share or unit price while getting its value by dividing the total number of shares for a fund. This value varies with time. So, the NAV of today differs from tomorrow. The companies publish their daily NAV on the newspaper and stock exchange websites to update the assets. It becomes a popular financial term in the investment industries because it helps extensively evaluate the worth of the products and shares.
- The difference between Asset and Liabilities is NAV.
- NAV changes every day.
- It represents per share value when divided by total outstanding share.
Calculation of NAV
It is already clear that the NAV of a company is calculated as the difference between its total assets and liabilities. Dividing the total shares associated the company with the difference value. If a simple formula equation expresses it, it becomes as follows:
To calculate NAV for a company or fund first, you must measure the company’s total assets and total liabilities. Then deduct the total liabilities from the total assets. This time you will get the numerator for the formula mentioned above. The total number of outstanding shares of the company or the fund is the denominator of the formula. When you divide the calculated numerator by the total number of outstanding shares, you will get NAV for that particular fund.
Calculative Example
Let’s have an example for calculating the NAV of a mutual fund. On a particular day within the trading closing time, the fund had the following financial condition described in the following table. The total outstanding shares of the fund are 5 million. Now we will calculate the data to find out NAV on that particular day of the company using the NAV formula.
Assets |
Amount (BDT) |
Liabilities |
Amount (BDT) |
Fund Worth |
50,000,000 |
Short Time Liabilities |
8,000,000 |
Cash |
4,000,000 |
Long Time Liabilities |
2,000,000 |
Receivable amount |
2,000,000 |
Expenses |
20,000 |
Income |
50,000 |
Total Liabilities |
10,020,000 |
Total Asset |
56,050,000 |
Total Asset = 56,050,000 BDT
Total Liabilities = 10,020,000 BDT
Total Shares = 5,000,000 BDT
On the other hand, an equity fund is a mutual fund that invests in stocks primarily. That fund tries to give the highest return and affects NAV. Here is an example:
Asset (amount in BDT) |
Liabilities (amount in BDT) |
||
Cash and cash equivalent |
10,000 |
Total long term debt |
20,000,000 |
Accounts receivable |
22,000,000 |
Total short term debt |
16,500,000 |
Net property |
40,000,000 |
Accounts payable |
20,000,000 |
Inventory |
24,500,000 |
Other currents Liabilities |
10,000,000 |
Total asset |
86,510,000 |
Total Liabilities |
66,500,000 |
Relationship between share price and NAV
Every company calculates Net Asset Value for their every share. It refers to per share NAV and approximately the same as the share price. On the other hand, share price refers to the price per share. Eventually, the share price of the funds is calculated depending on the NAV of the fund. For this, the investors need to invest a certain amount of money for obtaining each of the shares.
- Share price depends on the NAV of the fund.
- Increases when assets increase or liabilities decrease.
- Decreases when assets decrease and liabilities increase.
The per-share price of the fund based on Net Asset Value. When the net asset value increases, the per-share value’s price also increases, and when the net asset value of the fund decreases, the price per share also decreases. So, it can be said that the day with less expense and more income gives a higher per-share price based on NAV. On the other hand, the fund gives a lower per-share price when it makes more expense and less income.
Trade Timing for NAV
Creating a perfect timing for calculating NAV is very salient for the business. NAV is the asset value per share. A business company goes with assets, liabilities, expenses, etc. So the company and investors always look forward to analyzing the coordination of assets, liabilities, and expenses.
To figure out the daily value of a company’s shares, NAV is substantial. If the investors invest in the company, then the company will invest in another field. The whole processing indicates the financial stability of a company. Investors will invest in the company by seeing its standard with the help of its results.
NAV is a daily process; suppose you amass the information at 12 pm for NAV, then in the next day, you will have to accumulate the recorded assets and the liabilities after 12 pm. Formalities will indicate the exact result, which is necessary for the investors also for the company.
- Trade timeline is fixed for daily NAV calculation.
- When the trade timeline changes, the value of NAV also changes.
- It is necessary to maintain the same period for Calculating NAV.
Findings
Net Asset Value is a good indicator for assessing the performance of the fund. Investors often evaluate the financial stability of the funds and companies through evaluating and checking NAV. As it differs day to day, the fund and company authorities publish their updated NAV every day. If you look into the NAV of the fund, you cannot have a clear and convincing idea. To gain a better knowledge for making an adequate investment, you cannot but check the fund’s NAVs historically.