Skip to main content

Net Current Asset Value (NCAV)

Over 50 years ago Benjamin Graham, the father of value investing, began to utilized a measurement of a companies worth known as net current asset value. NCAV is value investing at its purest.

You are probably familiar with the measurement known as book value which is total asset minus total liabilities. But NCAV is slightly different. NCAV equals the companies current assets minus its total liabilities. For example:

OHB (Orleans Homebuilders) has the following items entered on its Q2 financial statements:

Current Assets = 3463.34

Total Liabilities = 2555.12

Total Common Shares Outstanding = 39.21

So the NCAV of OHB is 3463.34-2555.12 = 908.22

This number can then be converted into the more useful NCAV per share by dividing the NCAV by total common shares outstanding. Therefore, the NCAV per share is 908.22 / 39.21 = 23.16. At this point the NCAV per share could be compared to the market value of the shares to determine if the stock is trading at a fair value.

You might be wondering why it is recommended one uses NCAV as opposed to book value. The reason is simple- margin of safety. By using the NCAV you are essentially paying nothing for all the fixed assets- buildings, machinery, etc., or any goodwill items that may exist. As long as the company has a reasonable amount of financial strength (stay tuned for my next post covering this and other important details in value stock selection) it does not matter how the current earnings results are because you are paying so little for it.

The general recommendation for the use of NCAV in practical investing is to buy issues that are selling at only 66% or less of NCAV. It is my opinion that is far to rigid and up to 100% NCAV should be allowed for special circumstances.

Finding sub-NCAV stocks can be a very challenging and even impossible task, especially in a bull market. But in a bear market you will find that it is not all to uncommon for a stock to trade within our NACV requirements. There are many methods for finding these under priced issues. Some like to do a screen to narrow down the options to stocks most likely meet their requirements. Others just prefer to go through balance sheets by hand. My favorite is to visit http://www.grahaminvestor.com/screens/grahams_result which shows a list of all stocks currently trading below or near their NCAV. Of course this list contains many companies that would not be sound buys due to the fact that they may have insufficient financial strength to meet future road blocks. That is why I will be setting up a section of this blog dedicated to taking this list and pruning out the weaker companies, leaving only the most financially sound companies. This list will be updated weekly so you may want to check up on it every once in a while to see if any new value stocks have been added.

Well, that's about it for today, but I'll leave you with one final statement that is essential to any investor wishing to purchase NCAV stocks. That is- Do not be afraid. Do not be taken over by the pessimism of wall street that usually brings stocks to these levels. Remember that all bear markets pass, no matter how severe they may seem.

Comments

Net Asset Value said…
Impressive work - you have a brilliant blog here. Don't miss visiting this site http://www.smctradeonline.com/compare-mutual-funds.aspx about Net Asset Value It's all there: Mutual Fund Analysis, Compare Mutual Funds.

Popular posts from this blog

RIG

To me this stock looks incredibly cheap. first of all it has beat earnings expectations for the last 8 quarters except for Q3 of 2007. Its growth rate, while expected to slow is still incredibly high especially for the price that it is selling at. its price to earnings ratio is 4.94 which is very good. most companies with slow/no growth have p/e ratios under 10 but this company has a p/e under 10 even though it can still be considered a growth stock. this is reflected in another metric called the peg ratio or price/earning/growth ratio. RIG has a peg ratio of .22 which is the lowest in its industry suggesting that it is a good value. The company also has a very solid balance sheet and operates in an industry that is unlikely to take a serious hit even if the world does slide into a recession. As long as oil stays roughly were it is now or goes higher then the demand for oil rigs should go up. Currently oil is priced for a pretty major worldwide recession and I do not see it getting nea

NCAV List

Here is an updated list of stocks trading below their net current asset value that you might want to take a look at. Given the recent panic this list is very large but many of them are probably not even worth looking at because they are very unstable companies but I will do my best to take the worst ones out of the list. Remember that these are recommendations on what to research not on what to buy. Also note that an overwhelming majority of these are small cap tech stocks that I don't really understand. I have decided that on my next list I will include a non tech section so you don't have to go through a bunch of stocks that you might not be interested in at all. vvtv asfi crv nuhc twmc msn cobr neng voxx tbac haup infs tues issi dram tiii wga tlgd trid axti mfi hdng plcc tecd (first glance I have no idea why this company is selling this cheaply) trci duck ttil prls mlr fep smrt sts atrm auth bhe trt wmar parl zap dswl gv usu

Hedging

In recent weeks the market has crashed and if you have an account, it has probably been getting crushed. The markets are simply not functioning properly and with that in mind I propose various strategies of hedging your portfolio against further losses, assuming you have not run away from equities. 1. Every sector has a leader and every sector has a laggard. If you think you have found a company that is the absolute best in its industry then one of the best ways to hedge against this position is to short the worst company in that industry. for example, it has long been almost basic fact that Goldman Sachs was the leader of the investment banking industry. No one could really compare to Goldman Sachs. You could have bought GS and picked just about any other investment bank as your hedge by shorting it and you would have made a significant amount of money. This is despite the fact that GS is down over 50% from its high. 2. Sometimes there is no viable counterpart to a stock to use as a s