Net Current Asset Value Per Share (NCAVPS)
What it is:
How it works/Example:
The formula for NCAVPS is:
NCAVPS = (Current Assets - Current Liabilities) / Shares Outstanding
A current asset is cash or an asset that can be converted to cash within one year. A current liability is a liability that is due within one year.
For example, let's assume that Company XYZ has $10 million in current assets (as listed on the balance sheet), $4 million in current liabilities (also listed on the balance sheet), and 1 million shares outstanding. According to the formula, Company XYZ's NCAVPS is:
NCAVPS = ($10,000,000 - $4,000,000) / 1,000,000 = $6
The famous investor Benjamin Graham, author of The Intelligent Investor and mentor to Warren Buffett, made NCAVPS famous via his rule that he would only buy a stock if it were trading for less than 66% of its NCAVPS. However, note that his formula for NCAVPS uses total liabilities rather than current liabilities, and typically results in a smaller number. Here is the alternative formula for NCAVPS:
NCAVPS = (Current Assets - Total Liabilities) / Shares Outstanding
Why it matters:
Formula variations aside, Graham's contention was that investors tend to ignore asset value in favor of earnings. When stocks trade below a company's NCAVPS, they are essentially trading below the company's liquidation value and are the ultimate bargain.
[To learn more about Benjamin Graham and his investing philosophy, click here to read Benjamin Graham: The Father of Value Investing.]
Because net asset value encompasses a host of company activities, including inventory management, debt management, revenue collection, and payments to suppliers, it is important to understand that net asset value ratios vary from company to company and from industry to industry. For these reasons, NCAVPS comparisons are generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made within this context.