Net current asset value per share (NCAVPS) is a measure introduced by Benjamin Graham to gauge the attractiveness of a stock. This key metric for value investors is calculated by subtracting total liabilities (including preferred stock) from a company’s current assets and then dividing by the number of shares outstanding.
Key Takeaways
- Benjamin Graham developed net current asset value per share (NCAVPS) to help investors evaluate a stock’s potential worth.
- NCAVPS is calculated by subtracting a company’s total liabilities (inclusive of preferred stock) from current assets and dividing the result by the outstanding shares.
- Comparing NCAVPS with the share price, investors might discover undervalued stocks trading below their true value.
Delving into Net Current Asset Value Per Share (NCAVPS)
By examining industrial companies, Graham noted that investors often overlook asset values, focusing instead on earnings. Graham believed that comparing the NCAVPS with the current share price could reveal bargain opportunities.
Essentially, net current asset value represents a company’s liquidation value: the total worth of its physical assets minus intangible assets such as intellectual property, brand recognition, and goodwill. In a scenario where a company shuts down and sells off all its physical assets, this value would equate to its liquidation value.
Thus, a stock trading below NCAVPS allows investors to purchase a company for less than its current asset value. Provided the company has positive prospects, these stocks offer the potential for substantial returns.
Strategic Considerations
Beyond NCAVPS, Graham suggested additional value investing strategies to identify undervalued stocks. One such approach is defensive stock investing, involving the purchase of stocks that provide steady earnings and dividends irrespective of wider market and economic conditions.
Defensive stocks, particularly appealing for their recession-proof qualities, provide a cushion during economic downturns. These can often be found in sectors such as consumer staples, utilities, and healthcare, which are non-cyclical and less influenced by business cycles.
The Bottom Line
Graham posited that investors would reap significant benefits by investing in companies whose stock prices don’t exceed 67% of their NCAV per share. However, he also emphasized that not all stocks picked using the NCAVPS formula will yield strong returns. To mitigate risk, Graham recommended diversifying by holding at least 30 different stocks.
Related Terms: value investing, working capital, liquidation value, earnings, intangible assets, defensive stocks, non-cyclical stocks.
References
- Corporate Finance Institute. “Stock Investing: A Guide to Value Investing”.
