Net current asset value explained

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]

Notes and References

  1. Book: Graham . Benjamin . Security Analysis . 2008 . McGraw-Hill Education . 978-0071592536 . 6.
  2. Xiao. Ying. Arnold. Glen. 2007-03-06. Testing Benjamin Graham's Net Current Asset Value Strategy in London. en. Rochester, NY. 966188 .
  3. Web site: Net Current Asset Value Per Share (NCAVPS). 2021-10-20. Corporate Finance Institute. en-US.
  4. Book: Wendl. Victor. The Net Current Asset Value Approach To Stock Investing. 2013. Wendl Financial, Inc. 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. 10.2469/faj.v42.n6.40.
  6. Dudzinski . Jonathan . Kunkel . Robert . Ben Graham's NCAV (Net Current Asset Value) Technique in the 21st Century . The Journal of Investing . Spring 2014 . 23 . 1 . 17–23 . 10.3905/joi.2014.23.1.017 . 154660155 .
  7. Bildersee . John . Cheh . John . Ajay . Zutshi . The Performance of Japanese Common Stocks in Relation to Their Net Current Asset Values . Japan and the World Economy . September 1993 . 5 . 3 . 197–215 . 10.1016/0922-1425(93)90011-R.
  8. Xiao . Y. . Arnold . G.C. . Testing Benjamin Graham's Net Current Asset Value Strategy in London . Journal of Investing . Winter 2008 . 17 . 4 . 11–19 . 10.3905/JOI.2008.17.4.011 . 219232906 .