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What Is Net Current Asset Value (NCAV)? Formula and Example
Net current asset value (NCAV) is a company's current assets minus all of its liabilities and preferred stock. Benjamin Graham introduced it in his 1934 book "Security Analysis" as a conservative estimate of what a business would be worth in liquidation. Stocks trading below their NCAV are called net-net stocks.
By Logan Jorgensen · Published · Updated · 8 min read
日本語で読むKey takeaways
- Benjamin Graham introduced NCAV in 1934 as a conservative estimate of liquidation value: a company's current assets minus all of its liabilities and preferred stock.
- Stocks trading below their NCAV are called net-net stocks; Graham's strategy is to buy them, preferably below two-thirds of their NCAV.
- In the hypothetical example, NCAV is $65M, or $6.50 per share, and the $40M market cap is about 62% of it, below Graham's two-thirds threshold.
- NCAV is a rough estimate of possible liquidation value, not necessarily a precise valuation, and the strategy historically works best when you diversify across many NCAV stocks.
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How to Calculate NCAV
The basic formula for NCAV is straightforward:
However, some modern investors or screeners, including EveryNetNet, use a slightly different formula:
This version, which is what we at EveryNetNet use to screen for net-nets, adds minority interest to the calculation, making it generally a bit more conservative. Minority interest is the portion of a subsidiary that's owned by other investors.
Both formulas focus on current assets and ignore long-term assets like property or equipment. The idea is to look at what a company could quickly turn into cash if it had to liquidate today. Note that this is not the same as net current assets, the balance-sheet subtotal that deducts only current liabilities.
For the adjustments the formula leaves out and where to source each line, see how to calculate NCAV properly.
NCAV per Share: Making Comparisons Easier
To compare NCAV with stock prices, we calculate NCAV per share:
This lets us quickly see if a stock is trading below its NCAV, which could indicate it's undervalued.
NCAV Example: Calculating It Step by Step
Take a hypothetical company with $125 million of current assets (cash, receivables, inventory and other current assets), $60 million of total liabilities, no preferred stock, and 10 million diluted shares trading at $4.
- NCAV = $125M − $60M − $0 = $65M
- NCAV per share = $65M / 10M shares = $6.50
- Market cap = 10M × $4 = $40M
- Price to NCAV (P/NCAV) = $40M / $65M ≈ 0.62
Show data
| Item | Value |
|---|---|
| Current assets | $125M |
| Total liabilities | $60M |
| NCAV | $65M |
| Market cap | $40M |
The company trades at about 62% of its NCAV, below Graham's two-thirds threshold, so it qualifies as a net-net. Whether those current assets are really worth book value is a separate question; the stricter net-net working capital (NNWC) formula tests that.
To run these steps on a company you are looking at, use the NCAV calculator: it is prefilled with this example and also reports the NNWC figures.
The NCAV Investment Strategy
Graham's NCAV strategy is simple: buy stocks trading below their NCAV, preferably below 2/3 of their NCAV. The idea is that you're getting the company's current assets at a discount to a rough estimate of the company's liquidation value, throwing in potential long term assets or earnings for "free."
The key principle:
This approach aims to create a margin of safety, limiting potential losses while setting up for possible gains. For how the latest NCAV informs an exit decision, see when to sell a net-net stock.
Limitations of NCAV
While NCAV is useful, it's not perfect. Here are some things to keep in mind:
- It's a rough estimate of possible liquidation value, not necessarily a precise valuation.
- It might undervalue companies with valuable intangible assets or lots of opportunities for growth.
- It doesn't account for off-balance sheet items.
- The strategy historically works best when you diversify across many NCAV stocks.
- It may not work equally well for all types of companies, industries, or market conditions.
Despite these drawbacks, studies have shown that portfolios of stocks trading below NCAV have often beaten the market over time across different markets and countries. See what the net-net studies found, and use our 10-point net-net checklist to vet individual stocks.
Wrapping Up
NCAV remains a powerful tool for value investors. It offers a conservative way to spot potentially undervalued stocks and assess a company's financial health. While it shouldn't be used in isolation, NCAV can be a key part of a well-rounded investment strategy when combined with other research and analysis.