Many people have always considered net asset valuation in companies as one of the simplest and best methods.

In the article, we try to analyse further insights of using net asset value in a valuation by using a simple illustration of a scenario.

Net asset value is generally taken by having assets less your liabilities that is the remaining of what’s left to pay shareholders.

Assuming that you just started a company with $100. Somehow within a week, you managed to clinch a one billion dollars contract materialising in one year’s time but you do not have capital to start up this contract.

You managed to find Peter who is willing to pump in $50 million to have a 50% stake in the company.

You would have thought it was a steal, because you only paid $100 to own 50% while he had to pay $50 million to get 50% shares of the company.

If the company were to liquidate immediately, you would get back approximately $25million in return. (For simplicity, let’s assume there is no cost involved in liquidation).

Your assumption above is not wrong however it is based on the assumption that a company is going to liquidate now i.e. NAV value.

Now, have you ever thought why is Peter willing to inject this amount into the company and get only 50%. It is because Peter values the company not on a NAV valuation but on a future profit/cashflow valuation.

If the contract materialises in a year’s time, Peter will get a fair share of approximately $500 million return and that is a whopping 10 times return in 1 year.

If you would have thought about this, you would definitely not sell Peter at $50million only.

Of course, the above is just an illustration and is subject to many factors such as whether the $1 billion contract does materialise, etc. The above however, illustrates the simplified example of net asset value in a useful circumstance such as a liquidation.