What is net current asset value?

What is net current asset value?

Net current asset value (NCAV) is Benjamin Graham's liquidation metric. You subtract current liabilities from current assets to get it. When a stock trades below NCAV, you pay less than the value of its own break-up.

Graham introduced the metric in his 1934 book Security Analysis. He called the approach net-net investing. The strategy buys a basket of these beaten-down stocks. It's like picking up cigar butts with one puff left.

How do you calculate NCAV?

The formula is simple: NCAV = current assets - current liabilities. For a stricter version, use total liabilities. Compare that to market cap. If NCAV is higher, the stock is undervalued.

Say a company has $10 million in current assets and $4 million in current liabilities. NCAV is $6 million. If the market cap is $5 million, you're buying $6 million of liquidation value for $5 million.

What is NCAV per share?

To compare a stock to its price, convert NCAV to a per-share figure. Divide net current asset value by shares outstanding. Then compare that number to the market price. When price falls below NCAV per share, you have a net-net candidate.

Graham wanted margin of safety, and NCAV per share is its purest form. The market can drop a stock below its break-up value for many reasons. Fear, neglect, and distress all do the trick. That discount is your buffer against being wrong.

Does the NCAV strategy work?

A 1986 study found NCAV stocks returned 33.7% a year from 1971 to 1983. The market returned 12.1%. That's a huge gap, and the margin held across the full 13-year span Graham measured.

A 2014 study looked at 2003 to 2010. NCAV stocks made 24.7% annually. The gains weren't explained by standard risk models, so the edge looked like a genuine anomaly rather than compensation for risk.

International tests also pass. Japanese stocks returned 19.7% vs 16.6% benchmark from 1975 to 1988. London stocks returned 31.1% vs 20.5% from 1980 to 2005, so the effect was not confined to one market.

How to screen for net-nets

The classic Graham net-net screen is simple: buy stocks priced below net current asset value. You want NCAV per share above the share price. You'll find many struggling firms, so use a diversified basket to spread risk. One winner can pay for many losers.

True net-nets have grown rare. In Graham's day, depressed markets left dozens of stocks below liquidation value. Today screens often scan thousands of firms and find a handful. Patience and discipline matter more than cleverness.

Treat net-nets as a basket, not single bets. Many will founder, and a few will recover sharply. The edge lives in the average across many holdings. That is how the historical returns were earned, not through one lucky pick.

How strict should your NCAV cutoff be?

Graham bought only below two thirds of NCAV per share, a 66% rule that stacks a second margin on top of the first. The deeper the discount you demand, the thinner the pool and the wider the cushion you get.

The classic screen marks assets down before it trusts them. Cash counts in full, receivables at 75%, inventory at half. Anything owed to preferred or long-term creditors gets subtracted first, because it stands ahead of you. Off-balance-sheet liabilities, revealed only in the notes, can flip a positive NCAV negative.

Graham sold after a 50% gain and never held past two years. The target turns a net-net into cash you can redeploy, so patience has a timer, not just a price. A recheck every year keeps a stale net-net from eating your edge.

Banks and insurers fail this screen, because their assets are mostly loans that cannot be liquidated at book value. Compare companies the same way, and skip the balance sheets that do not translate into real cash you could take.