Asset-Based Valuation

Asset-Based Valuation uses market values of a company's assets and liabilities to determine the value of the company as a whole.

Asset based valuation works well for:

• Companies that do not have a significant number of intangible or "off-the-book" assets, and have a higher proportion of current assets and liabilities.
• Private companies, especially if applied together with multiplier models.
• Financial companies, natural resource companies and companies that are been liquidated.

Asset-based valuation may not be appropriate when:

• Market values of assets and liabilities cannot be easily determined.
• The company has a significant amount of intangible assets.
• Asset values are difficult to determine (e.g., in periods of very high inflation).
• Market values of assets and liabilities significantly differ from their carrying values.

Finance for Managers: Asset-Based Valuations - Liquidation Value

Liquidation value is similar to adjusted book value.  It attempts to restate balance-sheet values in terms of the net cash that would be realized if assets were disposed off in a quick sale and all liabilities of the company were paid off or otherwise settled.  This approach recognizes that many assets, especially inventory and fixed assets, usually do not fetch as much as they would if the sale were made more deliberately.  

A quick look at Nam Fatt - PN17 (1.5.2010)

Nam Fatt Corporation Berhad Company

Business Description:
Nam Fatt Corporation Berhad. The Group's principal activities are constructing bridges, heavy concrete foundations, roads, factory complexes and other similar construction activities. Other activities include building, maintaining and operating the Jiangjin Bridge on a built-operate-transfer basis, constructing projects in the oil, gas and petrochemical related industry, steel fabrication, structural steel engineering, manufacturing and trading steel doors and industrial boilers, researching, developing, producing, selling, installing and maintaining metal roofing and wall cladding, manufacturing galvanised iron roofing sheets, property development; owning and developing golf resort and its recreational amenities, property developer and property manager, resort and development, managing a golf resort and recreational clubs and investment holding. The Group operates in Malaysia, Africa and Asia.

Currency: Malaysian Ringgits
Market Cap: 28,763,370
Fiscal Yr Ends: December
Shares Outstanding: 319,593,000
Share Type: Ordinary
Closely Held Shares: 35,229,890 (11%)

16/03/2010
NAMFATT - New admission into PN17

Wright Quality Rating: LCNN Rating Explanations








A quick look at Nam Fatt - PN 17 (1.5.2010)
http://spreadsheets.google.com/pub?key=tAskkNgs3uU8eyk_WrTFcSw&output=html

Some RED FLAGS (hindsight) in the accounts of Nam Fatt at end of 2008 to note are:

Share price 
RM 0.19  or market capitalisation of 34.16 m. (The price rose to RM 0.30 from March 2009 and dropped precipitously to RM 0.09 when the news of the company's financial problem was known.)

Income statement
Negative earnings -14.09 m
Interest expense -18.73 m

Cash flow statement
Negative CFO  -41.27 m
Neglible CFI
Negative FCF  -44.10 m
CFF  -34.11 m (Borrowings increased significantly)

Balance sheet
Total Debt 499.69 m
Account Payables' Days 206.58 days  (This then increased to 714.24 days in end of 2009)
Interest cover 0.66
Total Debt/Equity 0.82
Net Debt to EBITDA 26.64  (Ideally, this should be less than 5.  Bankers do not lend if this ratio exceed this figure.)

Of interest, these commonly used parameters DID NOT raise any red flags at end of 2008:

Equity 607.44 m (What is the actual value?!)
NAV 1.59
Current ratio 1.54
Quick ratio 1.51
Account Payables' Days 82.22 days (Though this subsequently ballooned to 307.08 days in end of 2009)
LTD/Equity 0.34
Dividend 2.08 m


Related article:

Measure long-term solvency and stability

Assessing indebtedness. How much debt is too much?

Acceptable debt

Debt and Leverage: Financial weapon of mass destruction

Be fearful of excessive leverage and debt

Buying Stocks on the Verge of Bankruptcy

8 Signs Of A Doomed Stock

Red Flags and Pitfalls for Avoiding Financial Fakery

Asset valuation approach in liquidation

Liquidation value is the net realizable amount that could be generated by selling a company’s assets and discharging all its liabilities.

When valuing a business for liquidation, most assets are marked down and the liabilities treated at face value. 

• Cash and securities are taken at face value.
• Receivables require a small discount (perhaps 15 percent to 25 percent off).
• Inventory a larger discount (perhaps 50 percent to 75 percent off).
• Fixed assets at least as much as inventory.
• Any goodwill should probably be ignored.
• Most intangible assets and prepaid expenses should beignored.

The residual is the shareholders’ take.

This valuation method is useful for companies being dissolved.

Asset valuation approach in liquidation

Liquidation

Liquidation value is the net realizable amount that could be generated by selling a company’s assets and discharging all its liabilities.

When valuing a business for liquidation, most assets are marked down and the liabilities treated at face value.

• Cash and securities are taken at face value.
• Receivables require a small discount (perhaps 15 percent to 25 percent off).
• Inventory a larger discount (perhaps 50 percent to 75 percent off).
• Fixed assets at least as much as inventory.
• Any goodwill should probably be ignored.
• Most intangible assets and prepaid expenses should be ignored.

The residual is the shareholders’ take.

This valuation method is useful for companies being dissolved.

It doesn’t consider value arising from deploying the resources in combination. It is thus of limited use for valuing businesses as going concerns.


Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary

Liquidating Value of Assets

Liquidating Value of Assets

Percentage of Liquidating Value to Book Value
(Normal Range & Rough Average)

Type of Asset

Current assets: cash assets (including securities at market)
Normal Range: 100%
Rough Average: 100%

Current assets: receivables (less usual reserves)*
Normal Range: 75%-90%
Rough Average: 80%

Current assets: inventories (at lower of cost or market)
Normal Range: 50%-75%
Rough Average: 66% (2/3)

Fixed and miscellaneous assets: real estate, buildings, machinery, equipment, nonmarketable investments, intangibles
Normal Range: 1%-50%
Rough Average: 15% (approx.)


*Retail instalment accounts must be valued for liquidation at a lower rate. The range is about 30%-60%; the average, about 50%

Source: Security Analysis (New York: McGraw Hill, 1940), p.579

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Liquidating Value

When looking at the current asset value, we’re getting down to a notion that few investors care to ponder – the liquidating value.

Following the Great Depression the share price of public companies fell so low that many investors bought in just to sell off the companies’ assets and close their operations.

Liquidating a company is not a pleasant prospect, since workers lose their jobs, communities lose their income base, and society in general suffers.

The liquidating value is not only the end of the line; it can be seen as the absolute bottom line. There is no question that the ultimate intrinsic value is revealed when liquidation occurs.

The net current asset value (working capital) per share described by Graham also is a rough index of liquidating value. The liquidating value of a company is never a hard number. It can only be estimated, until a company actually is sold off. This is attributed to a fact we sometimes called Graham and Dodd’s first rule of liquidating value: “The liabilities are real but the value of the assets must be questioned.”

Fortunately, advise Graham and Dodd, it is enough to get a rough idea of the liquidating value for most purposes, accepting the fact that you won’t get, nor will you actually need, an exact figure.

A share price below liquidating value seldom is good news. Temporary conditions – a big stock market drop, a sudden reaction to shocking bad news – may impact a company to that extent. Very quickly, however, the share price should recover. When a stock persistently sells below its liquidating value, it indicates an error in judgment by someone – management, shareholders, or the stock market in general.