Maximum Net Asset Value Test Example

Perhaps a more direct play in the palm oil story is Golden Agri, a subsidiary of AFP. Its shares are now trading at an 82 per cent discount to NTA. And it turned in a profit of US814.6 million for the six months to June 30. However, it too is crippled by more than US$500 million of debt.

Meanwhile, there is still no sign of turnaround for optical and magnetic media maker General Magnetics. So although its shares are trading at an 86 per cent discount to NTA, further losses may eat into the assets to reduce the discount.

As for Ipco, the bulk of its assets are in loss-making associate companies. There are also a number of contingent claims on the company. So what you see on the books may not be what you'd get should things come to the crunch.

Premium to NTA At the other end of the spectrum are companies with a share price many times their NTA.

The worth of a profitable firm with a strong business model is not just the book value of its assets. One has to factor in the value it is able to generate as a going concern. Much of this value comes from intangible assets. For example, superior human resources, a patent, a brand name or goodwill built up over the years.

These assets are generally not recorded in the balance sheet and do not figure in NTA. But they can be used to generate supra normal profits, and so investors are willing to pay many times over the NTA for such a company's shares. Darco, Citiraya, Raffle LaSalle, Informatics and Hyflux are among such companies. On the other hand, theres another group of companies with a high price to NTA not because they have superior technology, brand name or franchise, but because their asset base has become small following years of losses.

These companies are in danger of tipping over to negative NTA - liabilities exceeding assets - if they don't stem their losses.

Wizoffice.com shares are trading at some 37 times NTA per share. Its net assets have dwindled following losses of S25 million. At June 30, 2002, net tangible assets amounted to just $428,000. The NTA per share is a mere 0.08 of a cent.

Other companies with substantial accumulated losses and therefore low NTA and high price/NTA include Teledata (accumulated losses of $13.7 million), EI-Nets (-$32.6 million), Reed Group (-$4.9 million) and Yong Nam ($33.9 million).

Of the companies still being traded, there are three with negative NTA. They are construction companies BBR Holdings and Presscrete, and Richard Lis Pacific Century Regional Developments.

Pacific Century, for example, has an NTA per share of -63 cents. A negative figure means that its total liabilities exceed its total assets. Pacific Century's accumulated losses of more than S1 billion have wiped out a huge chunk of its assets.