Key Takeaways
- Net asset value (NAV) in energy investments measures a company’s assets minus liabilities, often similar to its book value.
- For mutual funds, NAV is calculated by dividing net assets by outstanding shares, reflecting the price per share.
- Investors compare NAV to market capitalization to identify undervalued or overvalued energy companies.
- NAV models are preferred over discounted cash flow models for firms with limited growth potential in oil and gas reserves.
Net asset value (NAV) is the difference between a company’s assets and its liabilities. It can be used to differentiate mutual funds within the same sector, and it’s important in the oil, gas, and energy sectors. Investors can analyze the potential value of individual companies by considering factors like cash flow projections and existing reserves.
Find out how to use NAV effectively for investments within these industries.
What Is Net Asset Value?
Simply put, NAV is equal to a company’s assets less its liabilities. It is often the case that NAV is close to or equal to the book value of a business. Companies considered to have high growth prospects are traditionally valued more than NAV might suggest. In the context of a mutual fund, NAV is also equal to the price per share. To find a mutual fund’s NAV, take assets less liabilities and divide by the total number of shares.
How NAV Guides Investments in Oil, Gas, and Energy Companies
Even though NAV is an important number, open-end mutual fund investors should not gauge the performance of an oil, gas or energy fund on the basis of changes in NAV. This is because funds tend to pay out a huge percentage of their income and capital gains. Real returns are rarely captured by changes in NAV.
In terms of measuring the performance of individual firms, not mutual funds, NAV is most frequently compared to market capitalization to find undervalued or overvalued investments. There are also several financial ratios that use multiples of NAV or enterprise value for analysis.
Net asset valuation models are a nice alternative to traditional discounted cash flow, or DCF, models because energy companies cannot assume perpetual growth. The amount of reserves an oil or gas company currently has, for example, can significantly affect its net asset value per share, or NAVPS. This method allows investors to assume a production decline rate and calculate revenue until reserves run out.
