What it means
The idea comes from the investor Benjamin Graham, who sought bargains by looking at what a company would be worth if it shut down today. He focused on current assets, such as cash, receivables and inventory, because they can be turned into cash relatively fast, and ignored property, equipment and goodwill, which are harder to sell at full value.
After taking current assets, he subtracted total liabilities, both short-term and long-term, to represent everything owed to others. The remainder belongs to shareholders, and dividing it by the number of shares gives the value per share on that very conservative basis.
Graham liked to buy when the share price was no more than about two thirds of this figure, leaving a wide margin of safety. A company that trades below its NCAVPS is sometimes called a net-net, and such opportunities are rare and often found in small, neglected or troubled companies.
A business reader can use the measure as a stress test of downside. If a company has more liquid assets than total debts and the shares trade near that level, much of the risk is already priced in, whereas a share trading at several times NCAVPS depends on future profit rather than assets.
For this reason, Graham treated the measure as a screening tool and a sanity check, never as a complete valuation on its own. There are important caveats.
Inventory may be worth less than its book value, receivables can go unpaid, and a business that is losing cash may burn through its assets quickly. The measure also works poorly for service or technology firms, which hold few physical current assets but may still be valuable.
In practice
Real-world examples.
Example
A value investor screens small companies and finds a distributor with an NCAVPS of $3.00 and a share price of $2.00. She studies its inventory and receivables closely before deciding whether the discount is a bargain or a warning.
Example
A private equity buyer, considering the takeover of a struggling retailer, uses NCAVPS as a floor. If the offer price is below the net current assets per share, the buyer may be able to recover its investment through liquidation.
Example
A bank loan officer calculates the net current asset value of a borrower to see how much the lender would recover on the working capital if the business failed.
Formula
Calculation
NCAVPS = (Current assets - Total liabilities) / Shares outstanding
Worked example: a small manufacturer reports current assets of $30,000,000 and total liabilities of $18,000,000. It has 4,000,000 shares outstanding.
Net current asset value = $30,000,000 - $18,000,000 = $12,000,000
NCAVPS = $12,000,000 / 4,000,000 = $3.00
If the shares trade at $2.00, the price is $2.00 / $3.00 = 0.667, or about 67% of NCAVPS, which is right at the classic two-thirds threshold.Case study
Seen in the real world.
Oakhaven Supplies is an illustrative, fictional wholesaler whose shares fell sharply after a poor year. An analyst at a small investment firm calculated that current assets were $24,000,000, total liabilities were $15,000,000 and there were 3,000,000 shares, giving an NCAVPS of $3.00, while the shares traded at $1.80.
The analyst did not rely on the headline number. She visited the warehouse, discovered that about a fifth of the inventory was obsolete and reduced its value, and found that some receivables were from customers in dispute. She also read the notes to the accounts to check for off-balance-sheet obligations and lease commitments.
After her adjustments, the corrected NCAVPS was about $2.40, still above the market price. In this illustrative story, the firm bought a small position, and the analyst stressed that the discount was real but narrower than the first figure suggested. She set a review date in six months to see whether the company had burned cash in the meantime.
Watch out
Common mistakes.
- Using book values of inventory and receivables without testing whether they could actually be sold or collected.
- Forgetting to deduct long-term liabilities, which gives an inflated figure.
- Applying the measure to businesses with few current assets, such as software firms, where it is not meaningful.
Questions
People also ask.
Why did Graham ignore fixed assets?
He regarded them as less certain to realise their book value in a forced sale, so he based the calculation only on assets that convert to cash quickly.
Is a share trading below NCAVPS always a bargain?
No, because the company may be burning cash, and the true liquidation value can be lower than the accounts show, particularly if inventory has to be sold quickly at a discount.
How is NCAVPS different from book value per share?
Book value per share includes all assets, such as property and goodwill, while NCAVPS counts only current assets and subtracts all liabilities, so the result is a stricter, more conservative figure.
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