This is not to say that asset valuations on the balance sheet are inherently wrong. In the worst-case scenario, it is likely to be discounted or less valuable than what’s stated on the balance sheet. Some items, such as certain intangibles, may even be egregiously inflated, leading to huge disparities between what investors can derive from the balance sheet and what they ultimately receive.
The best asset a company can have for this valuation is cash, because it is valued at its face value and is the most liquid asset — hence, no discounting or adjustments are needed. The less liquid an asset is, the more adjusting or discounting is required. Secondly, the more uncertain an asset is about its ability to generate cash or financial value, the greater the discounting needed to account for that uncertainty. An example of this is current assets versus non-current assets, where the latter is likely to have greater valuation uncertainty solely because of the longer time horizon required to generate cash or financial value. The longer the period over which its valuation can fluctuate, the greater the asset’s uncertainty, and hence the larger the warranted discount.
Aside from that, it depends on the nature of the asset itself and how easy it is to value or forecast the cash or financial value it can generate. Certain intangible assets may be harder to value; hence, a higher discount is required for these assets than for more short-term, liquid assets.
Liabilities are taken as is — no discounting is needed, because what the company owes at any point in time will likely be at least as much as an investor who prioritises financial safety would require. For the more critical investor, contingent liabilities, which are not recorded on the balance sheet, may also be added to liabilities when computing net assets. This is because, generally, when a company goes under or winds up, there are likely to be many more legal claims and lawsuits, which are usually recorded as contingent liabilities.
See also: Cash is king, until it is not: Lombard Odier
This is a suggested guide or framework for discounting each item on the balance sheet and should vary by industry or business type; hence, strictly following the numbers may sometimes be misleading. To mitigate this risk, investors can examine how each balance sheet item fluctuates over a longer period to gauge its volatility. The more movement an asset’s value has, the higher the discount assigned to that specific asset on the balance sheet.
Case study
Singapore Telecommunications (Singtel) will be used to demonstrate this method of discounting every asset item on the balance sheet. Investors should note that this is a purely balance-sheet analysis method that focuses solely on valuing the company in the worst-case scenario. Broader financial safety ratios, such as the current ratio and debt-to-equity, indicate the company has adequate financial safety and a very low likelihood of default, with values of 1.04 and 37%, respectively.
See also: China market headed for another upcycle, says T Rowe Price’s Zheng
Based on the company’s latest FY2025/2026 results, Singtel’s total assets are $50.7 billion, with $21.98 billion in liabilities, leaving its net assets at $28.72 billion. Although this figure is extremely high on an absolute basis, the net asset per share is around $1.74, which, based on the company’s share price of $4.34, results in a price-to-book (or net assets) ratio of 2.49. In other words, for this specific type of analysis, for every $4.54 invested in the company, investors would only be able to get back $1.74 in the extremely unlikely event the company goes under. However, this is not adjusted for the assets’ discounted value; hence, investors can expect to receive less than $1.74 after adjustment.
Table 1 shows Singtel’s half-yearly asset values on its balance sheet over the past five years. The last column shows the standard deviation divided by the mean (also known as the coefficient of variation, or CoV), which indicates the extent of the data’s variability relative to the mean. This figure can be referenced or even used as the discount value, depending on how confident investors are in justifying it for each item.
From a simple, general, or broader overall total assets perspective, the CoV of 3.1% translates to an additional 3.1% discount to total assets of $50.7 billion, bringing the total to $49.1 billion. Using this figure, the adjusted or discounted net assets per share would be around $1.64, which translates to an adjusted or discounted price-to-book (or net assets) ratio of 2.65.
For individual items on the balance sheet, current assets typically have a lower discount rate, though this can vary by item. Firstly, cash does not need to be discounted if the goal is to convert everything into cash to return to investors. Cash equivalents, however, can be discounted slightly depending on the interest earned on these assets. Singtel’s cash equivalents mainly comprise fixed deposits, which have earned interest of 2.5% to 3.5% over the past few periods; hence, this figure can be used for the cash equivalents item on the company’s balance sheet.
Trade and other receivables should also be discounted at low rates, as they reflect expected credit losses (ECL). In a way, this item is adjusted, but investors can refer to the maximum exposure to credit risk to see the extent of the maximum loss. Alternatively, investors can apply a discount to the percentage of longer receivables relative to total receivables, since longer receivables carry greater uncertainty. Singtel classifies its receivables into three categories: less than 60 days, 61 to 120 days, and more than 120 days. In this case, the discount can range from 3% to 5% depending on the proportion of Singtel’s longer receivables to its total receivables.
Inventories are usually highly business-specific, so that the CoV can serve as a reference. For Singtel, investors can extrapolate data to estimate the resale value of the company’s equipment, applying a discount to the selling price of these inventories. Derivative financial instruments may sound complex, but the discount rate, like cash equivalents, can be derived from interest rates. Singtel’s derivative financial instruments comprise swaps, such as cross-currency, interest-rate and forward foreign-exchange contracts. Over the past few periods, the fixed and floating interest rates on these swaps have ranged from over 1% to over 6%. Hence, the upper bound of 6% can be used as the discount rate for this item.
For more stories about where money flows, click here for Capital Section
For other assets, the impact can vary widely by company. In the case of Singtel, these “other” assets include leasehold land, fixed deposits with maturities exceeding three months, net capitalised contract costs, prepayments, and other receivables. As the CoV is over 100%, investors could fully discount this item, but a better approach is to use variations in the individual assets that make up the “other” assets. For example, the movement in net capitalised contract costs over the previous year was around 10%, while the weighted average interest rate for fixed deposits and other receivables over the past few periods ranged from 1.6% to 5.0%. These variations can be referenced to compute a discount rate for the “other” assets item on the balance sheet.
The company’s property, plant and equipment (PPE) is usually depreciated over its estimated useful life. In Singtel’s case, it is calculated using the straight-line depreciation method, which has three key variables: the cost of purchasing the asset, the salvage value and the useful life. Since both the salvage value and useful life values are estimated, investors can use conservative figures to discount the salvage value further and use a shorter useful life figure if depreciation does not fully reduce the asset’s value to zero. Realistically, if a need arises to liquidate the PPE immediately, it would be done at fire-sale prices, with investors using conservative figures of 10% to 20% as a guide.
The right-of-use asset is classified as a non-current asset for Singtel. Additions, disposals, adjustments, translations, and reclassifications all affect this figure’s value, and it is very similar to PPE, so that similar discount figures can be used. For Singtel’s joint venture with Airtel, Telekomsel, Globe, Advanced Info Service and associate Intouch Holdings, if these companies are listed, a straightforward approach is to use the weighted average cost of capital (WACC) or a discount rate. In general, these are different companies with different management, so the best way to “discount” them is to use each company’s WACC.
Singtel’s fair value through other comprehensive income (FVOCI) is mainly composed of unquoted equity securities and given that equities can be extremely volatile, the CoV can serve as a reference. Or, if this figure is excessively high, the stock benchmark volatility or movement can be used instead. For example, if the Nasdaq’s one-year low was –10% and one-year high was 30%, then the larger value (considering movement) of 30% can be used as the discount rate for the FVOCI. Deferred tax assets, which are future tax benefits that reduce a company’s taxable income due to temporary differences between accounting and taxation rules, may vary significantly from company to company, so the CoV can be a useful guide for the discount rate.
Intangible assets
Lastly, the intangible assets. This is probably one of the most important asset items to be discounted, because there is usually significant uncertainty in valuing them. Depending on the type of intangible, different discount rates should be used. Goodwill, for example, is the value of a business acquired above its tangible assets, so this figure is subjective and should be discounted significantly. Conservative investors would ignore this item and use net tangible assets rather than net assets if goodwill makes up a significant portion of the company’s intangible assets, as is the case with Singtel. However, for Singtel, other substantial intangible assets can be valued with greater certainty, for example, its telecommunications and spectrum licences; hence, the discount for intangible assets does not have to be 100%.
This method of adjusted net assets, or adjusted book value, is great for investors who prioritise financial safety above all else. Investors should note that it does not consider other key investment ratios, such as profitability, yields and sentiment, to fully reflect a company’s value. A company may score poorly in this analysis but be excellent and undervalued overall; hence, other valuation methods such as discounted cash flow (DCF), sensitivity analysis and comparable analysis would provide a clearer picture of the company’s intrinsic value.
