What is Net Current Asset Value? (NCAV)

Net Current Asset Value, or NCAV, is a core concept in value investing. Introduced by Benjamin Graham in his 1934 book "Security Analysis," it's used to identify potentially undervalued stocks and assess a company's financial health. What does NCAV mean, and how can you use it in your investment strategy? Let's take a closer look.

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. By including it, we can get a (slightly) more accurate picture of a company's liquidation value.

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.

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.

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 is:

This approach aims to create a margin of safety, limiting potential losses while setting up for possible gains.

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, rather than betting on a few.
• 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.