Title: Net Current Asset Value Per Share (NCAVPS) — What It Is, How to Use It, and Practical Steps for Investors
Key takeaways
– NCAVPS is a conservative value metric introduced by Benjamin Graham that measures a company’s net current assets per share after deducting all liabilities (including preferred stock). (Graham; Investopedia)
– Formula: NCAVPS = (Current Assets − (Total Liabilities + Preferred Stock)) ÷ Shares Outstanding.
– Graham suggested buying stocks trading at no more than two-thirds (≈67%) of NCAVPS and diversifying (he recommended ~30 stocks). NCAVPS is best for deep-value screening, not for intangible-heavy or financial companies. (Graham; Investopedia)
What NCAVPS measures
– NCAVPS approximates a company’s liquidation value on a per-share basis using only current (short-term) assets and treating preferred stock as a liability. It’s more conservative than working capital because it subtracts total liabilities rather than only current liabilities. (Investopedia)
– Intangibles (goodwill, brand, patents) are excluded — NCAVPS focuses on tangible, near-term recoverable assets.
The formula (clear)
NCAVPS = (Current Assets − (Total Liabilities + Preferred Stock)) / Shares Outstanding
Step-by-step calculation (with example)
1. Pull the latest balance sheet.
2. Read off:
– Current assets (cash, marketable securities, inventory, receivables)
– Total liabilities (short-term + long-term)
– Preferred stock (if any)
– Shares outstanding
3. Compute net current assets = Current assets − (Total liabilities + Preferred stock).
4. Divide net current assets by shares outstanding to get NCAVPS.
Example:
– Current assets = $500 million
– Total liabilities = $300 million
– Preferred stock = $0
– Shares outstanding = 50 million
Net current assets = $500M − $300M = $200M.
NCAVPS = $200M ÷ 50M = $4.00 per share.
If market price = $2.50, price is 62.5% of NCAVPS (2.5 ÷ 4.0), meeting Graham’s ≤67% criterion — implying the market values the company below its conservative liquidation value.
How Benjamin Graham used NCAVPS
– Graham screened for companies trading substantially below net current assets (e.g., price ≤ 67% of NCAVPS), believing this created a margin of safety: buying a business at less than the value of its short-term tangible assets. He warned, however, that not all such picks will perform and recommended diversification (about 30 stocks). (Graham; Investopedia)
Practical steps for investors — a workflow
1. Define universe: look at small- and mid-cap, industrials, and distressed companies where tangible assets matter. Exclude banks, insurers and most tech/service firms.
2. Data collection:
– Use reliable sources (company 10-Q/10-K, S&P Capital IQ, Morningstar, Yahoo Finance, Finviz).
3. Compute NCAVPS for each candidate:
– Use the formula above.
4. Apply screening rule:
– Flag stocks trading at ≤67% of NCAVPS (Graham’s rule). Some deep-value investors use stricter cutoffs (≤50%).
5. Adjust assets conservatively:
– Reduce inventory for obsolescence or slow-moving stock.
– Discount receivables for collectibility concerns.
– Treat cash at troubled subsidiaries cautiously.
6. Qualitative check:
– Management integrity, recurring losses, lawsuits, contingent liabilities, pension deficits, and off-balance-sheet obligations.
– Industry prospects and whether liquidation is realistic (are assets marketable?).
7. Calculate position sizing and diversification:
– Treat NCAVPS-based positions as higher-risk—size accordingly and follow Graham’s diversification advice.
8. Define entry and exit rules:
– Example entry: price ≤ 0.67 × NCAVPS after adjustments; exit: sustained deterioration of asset realizability or price reaches a predetermined multiple of purchase price.
9. Monitor and re-evaluate:
– Update with quarterly filings; re-check asset realizability and liabilities.
Adjustments and conservative treatments (practical guidance)
– Inventory: apply markdowns when obsolescence, slow turnover, or cyclical declines exist.
– Accounts receivable: reserve for aging or disputed balances.
– Marketable securities: verify fair value and liquidity (some “securities” can be privately held or illiquid).
– Off-balance-sheet items: lease obligations, guarantees, and litigation can materially change realizable value.
– Pension and post-retirement liabilities: include unfunded obligations when material.
– Apply a contingency haircut to net current assets (e.g., 10–30%) when uncertainty is high.
When NCAVPS is most useful
– Distressed or liquidation-risk firms where current assets dominate book value.
– Small-cap industrials or asset-rich companies with low intangible content.
– Deep-value strategies that accept higher volatility and longer realization periods.
When NCAVPS is NOT appropriate
– Banks, insurance companies and other financial intermediaries (their balance sheets are structured differently).
– Companies where most value is intangible (software, pharmaceuticals, brands).
– Growing businesses where going-concern value (earnings, cash flow, growth) far exceeds liquidation value.
Risks and limitations
– NCAVPS assumes liquidation value approximates recoverable value; liquidation can be costly and yield less than book values.
– Ignores future earnings and franchise value — a cheap liquidation value doesn’t guarantee future upside.
– Market may be pricing in continuing losses, legal exposure, or deteriorating asset realizability.
– Low NCAVPS firms can be “value traps” — cheap for a reason (fraud, mismanagement, secular decline).
– Transaction costs, taxes and time to liquidation reduce investor returns relative to the simple NCAVPS calculation.
Portfolio implementation and risk management
– Diversify: Graham recommended a large basket (≈30 positions) to reduce idiosyncratic risk.
– Size positions small relative to total portfolio; treat NCAVPS investments as special-situation/deep-value allocations.
– Use stop-loss or re-assessment triggers based on business deterioration rather than mechanical price stops.
– Consider liquidity: many NCAV bargains have low trading volume; this increases execution risk.
– Tax and holding period: gains may take years to materialize; be mindful of tax implications of long-term holdings and eventual liquidation or sale.
Sample NCAVPS checklist
– Latest balance sheet reviewed.
– NCAVPS computed and compared with market price.
– Assets adjusted for conservatism (inventory, AR, marketable securities).
– Contingent liabilities and off-balance-sheet items considered.
– Management and industry outlook assessed.
– Entry/exit rules defined and position size determined.
– Monitoring schedule established.
Bottom line
NCAVPS is a time-tested, conservative measure for identifying deep-value bargains by comparing a company’s price to the liquidation value of its current tangible assets. It is most useful in specific contexts (asset-rich, distressed or small-cap industrial firms) and should be applied with conservative adjustments, qualitative due diligence, appropriate diversification and risk management. Graham’s original guideline (price ≤ 67% of NCAVPS) is a useful starting point, but modern investors must account for liquidation costs, off-balance-sheet risks, and the fact that many contemporary businesses derive value from intangibles not captured by NCAVPS. (Graham; Investopedia)
Sources and further reading
– Investopedia. “Net Current Asset Value Per Share (NCAVPS).” https://www.investopedia.com/terms/n/ncavps.asp (accessed via user-provided source).
– Benjamin Graham, The Intelligent Investor (classic text on value investing; see Graham’s discussion of net current asset values and margin of safety).
– Corporate Finance Institute. “Stock Investing: A Guide to Value Investing.” (background on defensive investing and value concepts).