Net Current Asset Value (NCAV)

Net Current Asset Value (NCAV) (also known as the “Net-Net” strategy) is a cornerstone concept in deep value investing, pioneered by the legendary Benjamin Graham. Imagine finding a wallet on the street containing €10 in cash, and you're offered the chance to buy the entire wallet for just €6. You'd snatch it up, right? That's the essence of NCAV investing. The formula is brutally simple: take a company's current assets (the stuff that can be turned into cash within a year) and subtract its total liabilities (every single penny it owes, both short-term and long-term). The result is a rock-bottom estimate of the company's liquidation value, assuming all its long-term assets like factories and brand names are worthless. When a company's total stock market value falls below its NCAV, you are essentially buying its liquid assets for pennies on the dollar, with the rest of the business thrown in for free.

Warren Buffett famously described Graham's approach as being like finding a discarded cigar butt on the street with one free puff left in it. It's not a premium smoke, and you wouldn't want to own it forever, but that one puff is pure profit. Similarly, NCAV stocks are often ugly, unloved, and unprofitable businesses. You aren't buying them for their brilliant future prospects. You're buying them because they are so mathematically cheap that you can likely wring out a final “puff” of profit as the market eventually recognizes the value of the underlying liquid assets, or the company is liquidated or acquired. This is a contrarian's dream: betting on statistical probability rather than rosy future forecasts.

The calculation for NCAV is a very conservative measure of a company's intrinsic worth. Formula: NCAV = Current Assets - Total Liabilities Let's break down the components:

• Current Assets: These are a company's most liquid assets, expected to be converted to cash within one year. They primarily include:
  • Cash and cash equivalents.
  • Accounts Receivable: Money owed to the company by its customers.
  • Inventory: The raw materials, works-in-progress, and finished goods the company holds.
• Total Liabilities: This is a crucial point. The formula uses all liabilities, not just current ones. It includes everything from short-term bills to long-term bank loans and bonds, making the calculation extremely conservative.

For example, let's say “CheapCo” has €100 million in current assets and €60 million in total liabilities. Its NCAV is €100m - €60m = €40 million.

Graham didn't just look for companies trading at their NCAV. He insisted on a deep discount, a concept he called the margin of safety. This buffer protects you from errors in calculation and the risk that the business will continue to lose money. The classic rule of thumb is to buy a stock only when its market capitalization (the total value of all its shares) is less than two-thirds of its NCAV. Formula: Market Capitalization < (2/3) x NCAV Using our “CheapCo” example with an NCAV of €40 million, you would only consider buying it if its total market value was less than (2/3) x €40 million, which is roughly €26.7 million. This massive discount is your protection. It means even if the company can only sell its inventory for half its stated value, you are still likely to come out ahead.

• High Margin of Safety: By definition, the strategy forces you to buy assets at a significant discount, creating a built-in cushion against loss.
• Statistically Proven: Numerous academic and independent studies have shown that a diversified portfolio of NCAV stocks has historically produced market-beating returns over the long term.
• Simplicity: The calculation is based on the balance sheet and avoids complex, often unreliable, forecasts about future earnings or economic conditions.

• Value Traps: A company is often this cheap for a reason. It might be rapidly burning through its cash, have incompetent or fraudulent management, or be in a dying industry. The price is low, but it could go even lower.
• Scarcity: Finding true net-nets that meet the 2/3rds criteria is difficult, especially during strong bull markets. They tend to appear in greater numbers during market panics or recessions.
• Requires Diversification: Relying on a single net-net is extremely risky. The strategy's success hinges on building a diversified basket of at least 15-20 such stocks. This way, the inevitable losers are more than offset by the big winners, allowing the statistical edge to work in your favor.

The Net Current Asset Value strategy is a powerful, time-tested tool for the truly patient and disciplined value investor. It’s not a method for finding the next great growth company; it’s a quantitative strategy for finding deeply, almost absurdly, undervalued ones. It forces you to look where others won't—in the bargain bin of the stock market. While a single “cigar butt” can easily get stamped out, a diversified portfolio of them can provide that satisfying, profitable puff that Benjamin Graham was looking for. Remember the two golden rules: demand a massive margin of safety and diversify broadly.