There are many bargains on the market and one way that bargains can be identified is to use the net tangible assets (NTA) value.
Here I'll explain how you can use this measure to help you identify cheap assets listed on the sharemarket.
Net tangible assets measure what the company's assets are worth. It takes all the assets of the company minus liabilities and then removes the things that are difficult to value such as goodwill, patents and trademarks.
It is often referred to as book value or bankruptcy value.
There are some companies at the moment which are trading below the book value. That means that the share price is worth less than net assets.
The prices to book (P/B) value measures the share price to the net tangible assets per share. Usually this number is greater than one,
reflecting that the share price is worth more than what the net assets of the company are worth.
Recently, because of the dramatic downturn in the sharemarket you have markets discounting the value of assets. That means that they could be a potential bargain.
This price to book ratio was a favourite of the father of value investing, Benjamin Graham.
Benjamin Graham's most famous student was Warren Buffet. Benjamin Graham was a fan of researching a stock and he accepted that any indicator was not perfect.
As a starting point he liked a P/B ratio below 1.5 for the defensive investor.
But before you run out and buy stocks with a price to book value less than 1.5, you need to consider a number of factors:
Despite this, a price to book value less than 1 could signal that the stock is trading too cheap. It means that the net assets per share is worth more than the share price.
There are lots of these opportunities in the market at the moment. But be careful, it can also be a sign that the market believes that the stock is headed for bankruptcy.
A perfect example is TIM which, before going into voluntary administration, had a P/B value of 0.03.
So the price to book value can signal a cheap asset but you'll still need to do your research to make sure that there is a strong viable business behind the assets.
After all, in the end, it's an increase in future earnings which propels share prices upwards.
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Happy trading!
Julia Lee Equities Analyst Bell Direct