What is 'Net-Net'
Net-net is a value investing technique developed by Benjamin Graham in which a company is valued based solely on its net current assets. The net-net investing method focuses on current assets, taking cash and cash equivalents at full value, then reducing accounts receivable for doubtful accounts, and reducing inventories to liquidation values. Total liabilities are deducted from the adjusted current assets to get the company's net-net value.
BREAKING DOWN 'Net-Net'Graham used this method at a time when financial information was not as readily available, and net-nets were more accepted as a company valuation model. When a viable company is identified as a net-net, the analysis focused only on the firm’s current assets and liabilities, without taking other tangible assets or long-term liabilities into account. Advances in financial data collection now allow analysts to quickly access a firm’s entire set of financial statements, ratios and other benchmarks.
How Value Investing Works
Value investing is an investing approach that strives to identify stocks that are selling at less than intrinsic value, and one measurement of intrinsic value is book value, or assets less liabilities on the balance sheet. If, for example, a firm sells all of its assets for cash and uses the cash to pay all liabilities, any remaining balance is book value, or equity. If a stock is selling at less than book value, the price is attractive to a value investor. This strategy also focuses on companies that generate increasing earnings each year.
The Differences Between Fundamental and Technical Analysis
The net-net approach uses information in the balance sheet to assess stock values, which is a fundamental investing technique. Technical analysis, on the other hand, is the study of stock price patterns and trading volume. Technical traders believe that they can identify buy and sell prices based on historical patterns.
Factoring in Current Assets
Current assets, which are used in the net-net approach, are defined as assets that are cash, and assets that are converted into cash within 12 months, including accounts receivable and inventory. As a business sells inventory, and customers submit payments, the firm reduces inventory levels and receivables. This ability to collect cash is the true value of a business, according to the net-net approach. Current assets are reduced by current liabilities, such as accounts payable, to calculate net current assets. Long-term assets and liabilities are excluded from this analysis, which only focuses on cash that the firm can generate within the next 12 months.