NAV is the net assets of a company minus its liabilities. Most companies that use this metric have assets that are predominantly held for investment purposes, and often able to be marked to market on a regular, if not continuous basis.
Thus, to the degree that a company's assets are regularly traded, or otherwise easily valued, NAV has a reasonably direct relationship to value creation. When these conditions do not exist, then it becomes difficult to objectively measure NAV, and the company must resort to additional valuation oversight to make it usable as a performance measure.
What Net Asset Value misses
Many companies have at least some illiquid assets in their portfolio. Those assets may be held at their cost, or may reflect an estimate of their impairment, or may have a (often third-party) valuation performed. In any of these cases, we may have time lags or uncertainties with respect to the value of these assets, or have to otherwise trust that their valuations reasonably represent that asset's contribution to overall NAV.
In more volatile periods, or periods of high inflation, there may also be significant differences between the book and market value of the company's liabilities. Also, if the company has a significant number of preferred shares or warrants outstanding, then its liabilities may not reflect changes in the market values of those instruments until the shares are redeemed or the warrants exercised.
When it works
For companies with assets regularly marked to market, and whose liabilities are closely represented by their book values, changes in NAV can reasonably track changes in overall company value. This is commonly the case with investment management firms trading in relatively liquid assets, or with a small portion of their assets that must be objectively valued at regular intervals.
