Ask Colin

You look for Price to NAB multiples of 1.0 or less for value stocks. Would it worry you if the multiple was negative?

Let's just think about this. I am looking for a Price to NAB multiple of 1.0 or less. What this means is that the price I can buy the stock for is equal to or less than the Net Tangible Assets per share. In other words, that I pay a dollar or less for each dollar of assets. This is just common sense - to buy the assets as cheaply as I can.

Now let's think about a negative ratio. This is really a nonsense - the only thing it can mean is that the company has NEGATIVE net tangible assets! That means one of two things:

1. That the company has negative shareholders funds (Assets minus Liabilities equals Shareholders Funds, or Net Assets). In other words it has written off more than its capital, such that it owes more than it owns. It is surviving on the goodwill of its lenders, who obviously think they have a better chance of getting their money back if they let the company trade out of its difficulties than putting it into liquidation. You are not buying assets cheaply here- there are no net assets to buy. This is a very special situation and it will be hard for the average person to understand what is happening. Unless you have special information about the situation, or have an expert to advise you, I would just move on to the next company. Leave the hard ones to the experts - there are plenty of quite normal situations to invest in.

2. The company has large intangible assets. Again this is a special situation and you should be very sure you understand the real value of those intangible assets. As above, leave it to the experts and stick to the easy ones.

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