What is a major weakness of net asset valuation?

A major weakness of net asset valuation is that it ignores historic costs. This approach primarily focuses on the assets' current market value without accounting for the historical costs associated with acquiring those assets. As a result, it may not provide a complete picture of the true financial value of a company.

Historic costs offer insights into the initial investments made in assets and can help investors understand the long-term value created by those investments. By overlooking these historic costs, net asset valuation may misrepresent a company's financial situation, particularly in cases where asset prices have fluctuated significantly or where valuable intangible assets, which may not be fully captured by current market values, exist. This can lead to an incomplete assessment of worth, especially for companies with substantial long-term investments that may have appreciated differently over time.

In contrast, other factors such as future cash flows and earning capacity are important considerations in other valuation methods, which may provide a more comprehensive outlook on a company's potential profitability and financial health. However, the net asset valuation's omission of historical costs stands out as a significant limitation.