What Is Net Current Asset Value Per Share?

Net current asset value per share (NCAVPS) is a measure created by Benjamin Graham as one means of gauging the attractiveness of a stock. A key metric for value investors, NCAVPS is calculated by taking a company's current assets and subtracting total liabilities.

Graham considered preferred stock to be a liability, so these are also subtracted. This is then divided by the number of shares outstanding. NCAV is similar to working capital, but instead of subtracting current liabilities from current assets, total liabilities and preferred stock are subtracted.

The formula for NCAVPS is:

NCAVPS = Current Assets - (Total Liabilities + Preferred Stock) ÷ Shares Outstanding

Key Takeaways

  • Benjamin Graham created net current asset value per share (NCAVPS), a measure that helps investors evaluate a stock as a potential investment.
  • NCAVPS is a key metric for value investors and is arrived at by subtracting a company's total liabilities (including preferred stock) from its current assets and dividing the total by the shares outstanding.
  • By comparing the NCAVPS with the share price, Graham believed investors could find undervalued stocks at a bargain price.

Understanding Net Current Asset Value Per Share (NCAVPS)

Examining industrial companies, Graham noted that investors typically ignore asset values and focus instead on earnings. But Graham believed that by comparing the net current asset value per share (NCAVPS) with the share price, investors could find bargains.

Essentially, net current asset value is a company's liquidation value. A company's liquidation value is the total worth of all its physical assets, such as fixtures, equipment, inventory, and real estate. It excludes intangible assets, such as intellectual property, brand recognition, and goodwill. If a company were to go out of business and sell all its physical assets, the value of these assets would be the company's liquidation value.

So a stock that is trading below NCAVPS is allowing an investor to buy a company at less than the value of its current assets. And as long as the company has reasonable prospects, investors are likely to receive substantially more than they pay for.

Special Considerations

In addition to NCAVPS, Graham recommended other value investing strategies for identifying undervalued stocks. One such strategy, defensive stock investing, means the investor will purchase stocks that provide stable earnings and dividends regardless of what is going on in the overall stock market and economy.

These "defensive stocks" are especially appealing because they protect the investor during times of recession, giving the investor a cushion to weather downturns in the markets. Examples of defensive stocks can often be found in the consumer staples, utilities, and healthcare sectors. These stocks tend to do better during a recession because they are non-cyclical, meaning they are not highly correlated with the business and economic cycles.

The Bottom Line

According to Graham, investors will benefit greatly if they invest in companies where the stock prices are no more than 67% of their NCAV per share. And, in fact, a study done by the State University of New York showed that from the period of 1970 to 1983 an investor could have earned an average return of 29.4%, by purchasing stocks that fulfilled Graham's requirement and holding them for one year.

However, Graham made it clear that not all stocks chosen using the NCAVPS formula would have strong returns, and that investors should also diversify their holdings when using this strategy. Graham recommended holding at least 30 stocks.