Net current asset value

The net current asset value (NCAV) is a financial metric popularized by Benjamin Graham in his 1934 book Security Analysis.[1] NCAV is calculated by subtracting a company's total liabilities from its current assets. Graham suggested a value investing strategy of buying a well-diversified portfolio of stocks that have a net current asset value greater than their market cap. This strategy is sometimes referred to as "cigar-butt" investing, because it tends to focus on struggling companies that are trading below their liquidation value.[2]

Methodology

A company's net current asset value (NCAV) can be calculated as: 

Net Current Asset Value (NCAV) = Total Current Assets - Total Liabilities

And a company's market cap is calculated as: 

Market Capitalization (MC) = Number of Shares Outstanding × Current Price per share

If NCAV > MC then the stock is considered undervalued.[3][4]

Historical returns

United States stock market returns

A 1986 study found that a Ben Graham-style NCAV investing strategy outperformed the benchmark from 1971 to 1983. The NCAV strategy produced a return of 33.7% compared to 12.1% for the benchmark.[5]

A 2014 study found that the NCAV strategy produced an annualized geometric return of 24.7% from 2003 to 2010; the excess returns were unexplainable by either the capital asset pricing model or the Fama-French-Carhart model.[6]

International stock market returns

A 1993 study found that the NCAV strategy in Japanese stocks produced a return of 19.7% compared to 16.6% for the relevant benchmark from 1975 to 1988.[7] A 2008 study found that the NCAV strategy on the London Stock Exchange produced a mean annualized return of 31.1% compared to 20.5% for the relevant benchmark between 1980 and 2005.[8]

References

  1. ^ Graham, Benjamin (2008). Security Analysis (6 ed.). McGraw-Hill Education. ISBN 978-0071592536.
  2. ^ Xiao, Ying; Arnold, Glen (2007-03-06). "Testing Benjamin Graham's Net Current Asset Value Strategy in London". Rochester, NY. SSRN 966188. {{cite journal}}: Cite journal requires |journal= (help)
  3. ^ "Net Current Asset Value Per Share (NCAVPS)". Corporate Finance Institute. Retrieved 2021-10-20.
  4. ^ Wendl, Victor (2013). The Net Current Asset Value Approach To Stock Investing. Wendl Financial, Inc. ISBN 978-0-9858375-2-5.
  5. ^ Oppenheimer, H.R. (1986). "Ben Graham's Net Current Asset Values: A Performance Update". Financial Analysts Journal. 42 (6): 40–47. doi:10.2469/faj.v42.n6.40.
  6. ^ Dudzinski, Jonathan; Kunkel, Robert (Spring 2014). "Ben Graham's NCAV (Net Current Asset Value) Technique in the 21st Century". The Journal of Investing. 23 (1): 17–23. doi:10.3905/joi.2014.23.1.017. S2CID 154660155.
  7. ^ Bildersee, John; Cheh, John; Ajay, Zutshi (September 1993). "The Performance of Japanese Common Stocks in Relation to Their Net Current Asset Values". Japan and the World Economy. 5 (3): 197–215. doi:10.1016/0922-1425(93)90011-R.
  8. ^ Xiao, Y.; Arnold, G.C. (Winter 2008). "Testing Benjamin Graham's Net Current Asset Value Strategy in London". Journal of Investing. 17 (4): 11–19. doi:10.3905/JOI.2008.17.4.011. S2CID 219232906.