Is a higher net asset value per share really better? Understand the traps in stock selection in one article.

When it comes to stock selection, many people are superstitious about the idea that "the higher the net asset value per share, the better," but this is actually a big pitfall.

What is the net asset value per share?

In simple terms, Net Asset Value per Share = Total Company Assets ÷ Total Number of Shares. This represents how much real assets are behind each share of stock.

The formula is: Net asset per share = ( Total Assets - Total Liabilities ) / Number of Outstanding Shares

For example: Company A has assets of 2.5 billion, liabilities of 1 billion, and 1 billion outstanding shares. The net asset value per share is (25-10)÷10 = 1.5.

Is this indicator reliable?

Not that reliable. There are mainly three pitfalls:

1️⃣ High net asset value per share ≠ stock price must rise

Stock prices are determined by future earnings, while net worth is merely the accounting book value. A company's net worth will indeed increase as it earns money each year, but this does not mean that stock prices will rise immediately. Stock prices are also influenced by multiple factors such as market sentiment, industry prospects, and competitiveness.

2️⃣ Net asset value changes cannot directly determine the company's prospects.

The increase in net worth may come from two reasons:

• Company Operations Improvement (Good Signal)
• Issuance of new shares or stock dividends (this is just an accounting operation and does not represent an actual improvement in operations)

So when you see the net value rise, you need to first understand the reason.

3️⃣ The industry differences are significant.

In industries like industrial manufacturing and agriculture that rely on physical assets to make money, net asset value is very important. However, for technology companies (like NVIDIA and Microsoft) and media companies (like Netflix), which primarily depend on intangible assets and creativity, net asset value is not as critical. Even if the net asset value is low, as long as the product has a market, it is worth investing in.

Conclusion: Net asset value per share is not always better when it is higher. Simply pursuing a high net asset value may cause you to miss out on many truly good companies.

Actual Use of Net Asset Value per Share

Measure the company's risk resistance ability

The higher the net asset value per share, the more substantial the company's assets, and the stronger its ability to withstand risks. This is an indicator for assessing the company's "margin of safety."

Judgment of Stock Valuation

Price-to-Book Ratio (PBR) = Stock Price ÷ Book Value per Share

• PBR < 1: The stock price is below its net value and may be undervalued (but be cautious if there are issues with the company)
• PBR > 2: The stock premium is relatively high, and there are already high expectations for pricing.

The key is to compare within the same industry. The PBR differences across different industries are significant, and cross-industry comparisons are meaningless.

For example, cyclical stocks (shipping, steel, finance) are more suitable for stock selection using PBR, as these companies have large profit fluctuations, and net worth is a more stable reference point.

Actual Case

The stock price of Master Kong is 18 yuan, with a net value of 10 yuan, while the stock price of Uni-President is 20 yuan, with a net value of 15 yuan. At first glance, Uni-President seems expensive, but its net value accounts for 75% of its stock price (indicating more stable operations), whereas Master Kong only accounts for 56%. Therefore, Uni-President has a lower actual risk.

Conversely, if the stock price of Master Kong falls to 8 yuan (below the net value of 10 yuan), it may indicate that it is undervalued—provided that the company’s operating conditions have not deteriorated.

Net Asset Value per Share vs Earnings per Share

| Indicator | Net Asset Value per Share | Earnings per Share | |------|---------|----------| | What it reflects | Asset scale | Profitability | | Applicable Scenarios | Value Investment, Stable Analysis | Growth Investment, Profit Assessment | | Commonly Used Indicators | Price-to-Book Ratio | Price-to-Earnings Ratio (P/E) | | Limitations | Unable to assess growth potential | Unable to assess asset security |

A company may have a high net worth but poor profitability (many assets but low efficiency), or it may have a low net worth but strong profitability (few assets but very valuable). In practice, stock selection should combine these two indicators.

How to Select Stocks Using PBR?

Usage

1. Peer Comparison: Only compare companies within the same industry.
2. Historical Benchmark: The historical range of PBR for the same stock (for example, usually between 1.6 to 2.5 times, now at 1.2 times is relatively cheap)
3. Beware of Traps: A continuous decline in PBR may indicate that the company is on a downward trend, not that it is a bargain.

quality stock reference

Taiwan Stock Exchange:

• TSMC (2330): PBR approximately 4.29, industry leader, net value reflects capacity value.
• Formosa Plastics (6505): PBR is about 2.45, a cyclical stock, suitable to use this indicator.
• Taiwan Large (3045): PBR approximately 3.29, stable cash flow business

U.S. Stocks:

• JPMorgan ( JPM ): PBR about 1.94, a financial leader, net worth reflects capital strength.
• Ford (F): PBR approximately 1.19, traditional manufacturing industry, asset heavy
• General Electric ( GE ): PBR around 0.70, industrial group, undervalued by the market.

Query Net Asset Value per Share

1. Trading platform direct inquiry (such as stock software, financial websites)
2. Company Financial Report Manual Calculation: ( Shareholders' Equity ) ÷ ( Circulating Shares )

Commonly used query websites: PlayStock, HiStock, Financial Report Dog, nStock

Summary

The net asset value per share is a defensive indicator that helps you assess the quality of a company's assets and the safety margin of its stock. However, it is not an offensive indicator and cannot predict price fluctuations or company growth.

The correct usage is:

• Use net asset value screening to find companies with a high margin of safety
• Use surplus assessment to evaluate growth potential
• Use PBR judgment for relative valuation
• Make decisions based on industry characteristics

Focusing solely on high net worth will only lead to getting stuck in value traps. Smart investors will look at net worth, profitability, and growth at the same time to find truly good stocks.