Determining a figure for the replacement value of the balance sheet is the first step I take in arriving at the value I would pay for a company. This includes marking up land and buildings to current market values, adding assets and liabilities for operating leases, as well as adding intangible assets such as customer relations, product portfolio and licenses. Once complete, simply subtract the liabilities from the assets to find the net asset value (NYSE:NAV) of the company. Dividing this by the number of shares outstanding yields the NAV per share.
This NAV is what you would expect an optimally performing company in the industry to be worth. All assets would be bid to their fair value in a perfectly competitive environment. That is, in a perfectly competitive environment an optimally performing company's ROIC would be equal to its WACC.
Now in the real world the NAV of a company is not necessarily equal to its actual worth. There will be companies that are under-utilizing their assets (will be worth less than NAV) as well as companies that hold a franchise value (worth more than NAV as they are not in "perfect" competition). As such, the next step is to find the earning power of a company in order to arrive at a value based on actual cash flows. This will be discussed next.