In-depth analysis of equity net worth calculation: How to accurately select stocks through book value per share?

Understanding the Core Concepts of Net Asset Value (NAV) Calculation

When making stock investment decisions, many investors refer to a key indicator—Net Asset Value per Share (NAVPS), which represents the actual asset value contained in each share.

To understand how to calculate NAV, first clarify the meaning of “net worth.” The net worth of a publicly traded company is essentially its remaining value after subtracting all liabilities from its assets. In other words, it is the total assets the company owns after paying off all debts, salaries, and operational costs (such as utilities, rent, depreciation of equipment, etc.).

Therefore, NAV per share is the company’s total net worth divided evenly among all outstanding shares, reflecting the intrinsic asset value represented by each share in the market. Generally, the higher the NAV per share, the more substantial the asset backing per share.

Specific Formulas and Practice for NAV Calculation

The most basic formula for NAV is:

NAV per share = Net Assets / Total Outstanding Shares

From an accounting perspective, since net assets equal total assets minus total liabilities, NAV can also be expressed as:

NAV per share = (Total Assets - Total Liabilities) / Total Outstanding Shares

Or, detailed by accounting items:

NAV per share = (Share Capital + Capital Surplus + Retained Earnings + Unappropriated Profits) / Total Outstanding Shares

Let’s understand this process through an example. Suppose Uni-President (1216.TW) has total assets of NT$2.5 billion, total liabilities of NT$1 billion, and 1 billion shares outstanding. Then:

NAV per share = (2.5 billion - 1 billion) / 1 billion = NT$1.5

If the company’s share capital is NT$700 million, capital surplus NT$400 million, retained earnings NT$300 million, and undistributed profits NT$100 million, with 1 billion shares outstanding, then:

NAV per share = (700M + 400M + 300M + 100M) / 1 billion = NT$1.5

Comparing NAV per Share and Earnings per Share: Two Investment Perspectives

In stock selection strategies, investors often face choices between NAV per share and Earnings per share (EPS). While both are important, they focus on different aspects.

Earnings per share (EPS) is calculated as:

EPS = (Net Profit - Preferred Dividends) / Number of Common Shares

Fundamentally, NAV per share reflects the asset base, focusing on how much tangible assets the company owns; whereas EPS indicates profitability, measuring how much profit the company generates from its assets.

A company might have a large asset base (high NAV per share) but low efficiency in utilizing those assets, resulting in modest EPS. Conversely, some asset-light tech companies may have low NAV per share but strong earnings.

Investment strategies based on NAV per share:

• Value Investing: Looking for stocks trading below their NAV, believing they are undervalued by the market.
• Financial Stability Assessment: A higher NAV per share generally indicates more tangible assets backing the company, implying stronger risk resistance.
• Limitations: Relying solely on this indicator may not accurately evaluate companies with significant intangible assets (e.g., software or media companies).

Investment strategies based on EPS:

• Growth Investing: Tracking companies with high EPS growth rates, expecting future stock price appreciation.
• Profitability Benchmarking: Companies with EPS above industry average often have competitive advantages.
• Price-to-Earnings Ratio (P/E): Using EPS to calculate P/E ratio helps assess whether a stock is over- or undervalued.

Application and Investment Judgments of Price-to-Book Ratio (PBR)

Price-to-Book Ratio (PBR) compares a stock’s market price to its NAV per share, calculated as:

PBR = Market Capitalization / NAV per share

A lower PBR generally suggests a cheaper stock; a higher PBR indicates a more expensive stock.

However, a low PBR does not automatically mean a stock is worth investing in. PBR should be used as one of several reference indicators, combined with the company’s financial health, operational performance, industry characteristics, and overall market environment.

This metric is most effective when used for horizontal comparison within the same industry or for longitudinal comparison of the same company over different periods. For example, if a stock’s historical PBR ranges from 1.6x to 2.5x, falling below 1.6x might suggest undervaluation; but a continuous decline warrants caution as it could indicate operational difficulties.

Note that PBR varies significantly across industries. Cyclical sectors (such as shipping, steel, energy) and financial insurance companies are particularly suitable for this metric due to their stable asset structures. Conversely, tech, consumer, and media companies, which rely heavily on intangible assets, have less meaningful PBR comparisons.

Practical Significance of NAV per Share in Investment Decisions

An important reference for evaluating company performance

NAV per share reflects the accumulated results of a company’s operations over the years and forms the basis for stock valuation. A higher NAV per share indicates a stronger wealth backing each share, as well as better profitability and risk resilience.

Under stable fundamental conditions, comparing stock prices to NAV per share over different periods can roughly indicate whether the current price is over- or undervalued—if the stock price exceeds NAV, it may be overvalued; if below, undervalued.

The concrete embodiment of shareholders’ equity value

According to the NAV calculation formula, with a fixed number of shares, NAV per share essentially reflects shareholders’ equity. In theory, if a company goes bankrupt and liquidates, the higher the NAV per share, the more value each shareholder can recover.

However, actual liquidation values often differ from NAV due to factors like depreciation of fixed assets and market fluctuations.

For example, compare two competing food companies: Master Kong with a stock price of NT$18 and NAV of NT$10; Uni-President with a stock price of NT$20 and NAV of NT$15. The latter’s higher NAV indicates more stable operations and lower debt. Conversely, if Master Kong’s stock price suddenly drops to NT$8 (below its NAV of NT$10), and the company’s fundamentals remain unchanged, this could suggest undervaluation.

Understanding the True Causes of NAV per Share Fluctuations

Changes in NAV per share usually stem from two reasons: actual changes in company operations or capital structure adjustments such as issuing new shares or distributing shares.

When making stock selections, it is crucial to distinguish between these. If the decline is due to poor management, avoid holding such companies; if due to capital restructuring, the change in NAV per share alone is not a direct investment criterion, as issuing new shares to raise NAV does not necessarily indicate growth potential. Conversely, share distribution that dilutes NAV per share does not automatically mean deteriorating operations.

NAV per Share Is Not the Sole Criterion for Stock Selection

Many investors fall into the misconception that a higher NAV per share is always better. This is a bias.

Depending on industry characteristics, the standards for evaluating NAV per share should differ. For industries relying heavily on land and equipment, such as manufacturing or agriculture, NAV per share is an important indicator. For service industries dependent on intangible assets, especially those centered on creativity, NAV per share is less relevant.

For example, leading tech companies like NVIDIA, Netflix, and Microsoft may have relatively modest NAV per share, but their brand value, patents, and market position are invaluable. These intangible assets are far more significant for investment than the reported net worth.

Therefore, if investors obsessively pursue higher NAV per share, they risk missing many high-growth opportunities. A rational investment approach should focus more on future growth potential rather than just current liquidation value, which may be discounted.

How to Check NAV per Share

Directly via Trading Platforms

Most stock trading platforms and financial info websites display NAV per share after entering the stock code, usually in the basic info section. Common platforms include StockWang, HiStock, and Financial Report Dog.

Calculating from Financial Statements

For example, using Uni-President’s 2021 annual report data and the NAV formula:

NAV per share = (Total Assets - Total Liabilities) / Number of Shares Outstanding ≈ NT$2.8

This method requires extracting data from the company’s publicly disclosed financial statements but ensures accuracy and timeliness.

Summary and Investment Recommendations

NAV per share is an important indicator for analyzing stock investment value, providing a new dimension for evaluation. By properly applying NAV per share and PBR, combined with the company’s profitability, industry outlook, and macroeconomic environment, investors can more effectively select high-quality targets aligned with their investment goals.

However, it is essential to remember that NAV per share is not the only standard for investment decisions. Blindly pursuing higher NAV per share may cause investors to miss many promising growth opportunities. The most prudent approach is to use NAV per share as part of fundamental analysis, combined with other indicators (such as EPS, P/E ratio, industry position) for comprehensive, rational investment evaluation.