Asset-Based Valuation

The simplest way to value a company is to add up what it owns and subtract what it owes. If the company’s assets could be sold for more than the value of its business as a going concern, the assets are the value.

Even if they could not, the net assets give a starting point: a floor below which the shareholders will not sell if they can liquidate the company instead. Asset-based valuation is the oldest method, and still the right one for companies whose value lies in what they hold rather than what they earn (property companies, investment companies, firms about to close).

But for most operating businesses it misses the most important thing, the earning power of the people and the organisation using the assets.

This topic explains the three asset-based methods (book value, net realisable value and replacement cost), how to adjust the statement of financial position, when each is appropriate, the criticisms, and how a figure for goodwill can be added to net assets by capitalising the earnings above a normal return, with worked examples. The next topic covers income-based valuation with price/earnings ratios and earnings yields.

The syllabus asks for the estimate of a business value using asset-based valuations. Read why value a business and the information needed first.

The three asset-based methods

Net asset value on a book basis

This uses the figures in the statement of financial position: total assets less total liabilities, which equals ordinary shareholders’ equity (share capital plus reserves).

The figures are readily available, but non-current assets are at historical cost less depreciation, which may bear no resemblance to current value, and important intangible assets such as internally generated goodwill, brands, customer relationships and the skills of the employees are left out because they are not recorded.

At best this method provides a minimum value; shareholders of a target will not accept less than book value, and an offer must be “book value plus”. If non-current assets are revalued regularly, book value may be a reasonable starting point.

Net realisable value (break-up value)

Here each asset is valued at the amount that could be obtained by selling it, less the costs of selling. Liabilities are deducted: the sum the shareholders would receive if the company were wound up. Receivables are reduced for bad debts.

This figure is usually irrelevant for a going concern, since an acquirer intends to continue the business, and a going concern should be worth more than its break-up value. But it is the right method where the assets are worth more sold than used, or where the intention is to liquidate. A company can never be worth less than its break-up value to a shareholder who can force a sale.

It is also hard to estimate disposal values for assets in a takeover, except approximately.

Replacement cost

This values the net assets at the cost of acquiring them on the open market today. It is a more accurate measure of what it would cost to build a similar business than book value. But it is still short of the truth because intangible assets are excluded, and it is very difficult to identify and value every asset and liability individually.

A worked example

Beta Ltd (500m shares of ₦1) has these book values (₦m): non-current assets 2,400; inventory 800; receivables 1,100; cash 150; payables 900; long-term loan 600. Book net assets = 2,400 + 800 + 1,100 + 150 − 900 − 600 = ₦2,950m (₦5.90 a share). A valuer estimates:

• replacement cost of non-current assets ₦3,100m and of inventory ₦860m
• realisable value of non-current assets ₦1,700m, inventory ₦650m, and 90% of the receivables can be collected
• the costs of closing down would be ₦120m

The same results come from the adjustment method: start with book net assets (2,950), take out the old value of each adjusted asset and put in the new one. Replacement: 2,950 − 2,400 − 800 + 3,100 + 860 = 3,710. Net realisable: 2,950 − 2,400 − 800 − 1,100 + 1,700 + 650 + 990 − 120 = 1,870. A bidder would see ₦3,710m as the cost to rebuild the net assets and ₦1,870m as the floor on break-up.

Adding goodwill

Net assets exclude the value of the business as a going concern, goodwill. A common way to estimate it is the super profit method: compare maintainable earnings with the normal return that the net assets should earn; the excess, super profit, is the return from the intangible advantages, and capitalising it gives a value for goodwill.

Maintainable earnings of Beta are ₦480m. A normal return of 10% on the replacement net assets of ₦3,710m is ₦371m, so the super profit is 480 − 371 = ₦109m. Capitalised at 20% (a higher rate than the normal return, since super profits are riskier and do not last for ever) the goodwill is 109 ÷ 0.20 = ₦545m, and the value of the business is 3,710 + 545 = ₦4,255m.

As a check, ₦480m of earnings at a required return of 12% would give 4,000m, in the same region. The estimate of goodwill depends heavily on the normal return and the capitalisation rate chosen, so it is an approximation and should be presented with its assumptions.

When to use asset-based valuation

• Property and investment companies, whose value is the market value of what they hold (net asset value per share, compared with the share price, shows a premium or discount).
• Companies to be liquidated or in distress, where net realisable value is the answer.
• As a floor in any negotiation, and to check other methods: a valuation by earnings that is below the break-up value suggests that the assets should be sold.
• Companies with little earnings history, for example start-ups with valuable assets.

Criticisms: unless the company will be broken up, its value comes from the returns it will generate, not from the value of the assets; book values are historical; intangible assets are missing or hard to value; individual assets are hard to identify and value; and contingent liabilities, off-balance-sheet items and the effect of the tax on a sale may be missed.

For the net realisable method, forced sales raise less than orderly ones.

The ideas in more depth

Why a going concern is worth more than its break-up value

The assets of a company used together by a good organisation earn more than they would fetch if sold one by one: machinery has a value in use, customers come with the business, staff know how to use the assets. If this were not so, the business would be worth selling off.

This is why break-up value is a floor, and why an acquirer that cannot make more of the assets than their disposal value should not buy the company at all.

Why replacement cost matters for a bidder

A bidder can build a rival business by buying the assets. If the target costs more than rebuilding it, the bidder is paying for goodwill: earning power, brand, position, which it must be sure it can retain and exploit. Comparing the price with replacement cost therefore shows how much is being paid for intangible advantages.

Sources and references

• International Financial Reporting Standard (IFRS) 3 Business Combinations (identifying and measuring the assets acquired, including intangibles, at fair value) and IFRS 13 Fair Value Measurement, which are the accounting counterparts of the valuer’s adjustments.

These points are stated as at 5 November 2026.

Worked examples

1. NAV.
   4,450 − 1,500 = ₦2,950m.
2. Per share.
   2,950 ÷ 500 = ₦5.90.

1. Adjust.
   2,950 − 2,400 − 800 + 3,100 + 860 = ₦3,710m.

1. Super profit.
   480 − 371 = ₦109m.
2. Goodwill.
   109 ÷ 0.20 = ₦545m.

How to answer in the exam

• Start with book net assets and show the adjustments line by line.
• Adjust only the items you are given and state the basis (replacement or realisable).
• Include costs of sale and bad debts for the realisable value.
• Comment that the result is a floor, excludes intangibles and may not suit a going concern.

Common mistakes in the exam

• Adding the new asset values to the book figure without removing the old ones.
• Forgetting the bad debts and closing costs in net realisable value.
• Treating asset value as the likely offer price.
• Including intangible assets that the question does not give.
• Mixing replacement cost and realisable value in one calculation.
• Dividing by the wrong number of shares.

Quick revision

• NAV = assets − liabilities; book, net realisable, replacement.
• Book and break-up values are floors; going concern is worth more.
• Adjust by removing the old value and adding the new.
• Goodwill = super profit ÷ capitalisation rate.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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