NCAV vs Net-Net Working Capital (NNWC): Formulas Compared

The NCAV formula

Every current asset counts at its book value, and every liability is subtracted, not just current liabilities. Long-term assets such as property, equipment and goodwill are ignored entirely. EveryNetNet also subtracts minority interest, which makes the figure a little more conservative; the methodology page has the details. For a fuller introduction, read what net current asset value is.

The net-net working capital (NNWC) formula

NNWC comes from the way Graham and Dodd estimated liquidation value in Security Analysis. They suggested rough recovery ranges for each kind of asset in a liquidation:

• Cash and marketable securities: 100% of book value
• Receivables: roughly 75% to 90%
• Inventories: roughly 50% to 75%
• Fixed and miscellaneous assets: roughly 1% to 50%

The NNWC formula keeps the current-asset part of that table, using the low ends of the ranges for receivables and inventory, and leaves fixed assets out entirely. Other current assets such as prepaid expenses get no credit.

Worked example

Take a hypothetical company with this balance sheet (all figures in $ millions):

• Cash: 40
• Receivables: 30
• Inventory: 50
• Other current assets: 5
• Total liabilities: 60
• Shares outstanding: 10 million, at $4 a share, so market cap is 40

At a $40 million market cap, the stock trades at 0.62× NCAV, comfortably inside Graham's two-thirds rule. Against NNWC it trades at 1.45×, so on the stricter test it is not a bargain at all. The difference is the inventory: if that stock would really sell for half of book in a liquidation, most of the apparent discount disappears.

NCAV vs NNWC: which should you use?

• Use NCAV to screen. It is simple, consistent across companies and countries, and it is the measure the published net-net studies test.
• Use NNWC to stress-test. When inventory or receivables make up most of the current assets, NNWC shows how much of the discount depends on those assets holding their value.
• Stocks below NNWC are rare. They are mostly companies with large cash balances relative to their liabilities, and they are the most conservative net-nets you can find.

Common mistakes when calculating net current assets

• Subtracting only current liabilities. That gives ordinary working capital, not NCAV. Long-term debt, pensions and leases all have to come out.
• Using basic share counts. Per-share NCAV should use diluted shares, so options and convertibles don't hide dilution.
• Mixing currencies. Many foreign companies report in local currency but list shares elsewhere. Convert the balance sheet and the market cap to the same currency.
• Using a stale balance sheet. A company losing money can burn through its NCAV between reports. Always use the latest filing.

Once you have a candidate, work through the 10-point net-net checklist before buying.