Net-Net

What Is Net-Net?

Net-net is a value investing technique developed by the economist Benjamin Graham, in which a company's stock is valued based solely on its net current assets per share (NCAVPS). Net-net investing thus 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. Net-net value is calculated by deducting total liabilities from the adjusted current assets. 

Net-net should not be confused with a double net lease, which is a commercial rental agreement where the tenant is responsible for both property taxes and premiums for insuring the property.

Key Takeaways

  • The net-net value investing strategy was developed by Benjamin Graham using net current asset value per share (NCAVPS) as the primary measure to evaluate the merits of a stock.
  • According to the net-net strategy, the ability to generate revenue from current assets is the true value proposition of a business.
  • 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.
  • The net-net investing strategy does not consider long-term assets or liabilities, making it unreliable for long-term investments according to its critics.

Understanding Net-Net Investing

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.

Essentially, investing in a net-net was a safe play in the short term because its current assets were worth more than its market price. In a sense, the long-term growth potential and any value from long-term assets are free to an investor in a net-net. Net-net stocks will usually be reassessed by the market and priced closer to their true value in the short term. Long term, however, net-net stocks can be problematic.

The formula for net current asset value per share (NCAVPS) is:

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

According to Graham, investors will benefit greatly if they invest in companies whose 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.

Special Considerations 

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.

Criticisms of Net-Net 

The reason net-net stocks may not be a great long-term investment is simply because management teams rarely choose to fully liquidate the company at the first sign of trouble. In the short term, a net-net stock may make up the gap between current assets and market cap. However, over the long term, an incompetent management team or a flawed business model can ruin a balance sheet quite rapidly. 

So a net-net stock may find itself in that position because the market has already identified long-term issues that will negatively affect that stock. For example, the rise of Amazon.com has pushed various retailers into net-net positions over time and some investors have profited in the short term. In the long term, however, many of those same stocks have gone under or been acquired at a discount. 

The net-net strategy of finding companies with a market value below its net-net working capital (NNWC)—cash and short-term investments + 75% of accounts receivable + 50% of inventory - total liabilities—may be an effective strategy for small investors. Net-net companies are sought after by day traders which may contribute to their rise in month-to-month valuation. 

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  1. Oppenheimer, H. R. (1986). Ben Graham’s Net Current Asset Values: A Performance Update. Financial Analysts Journal42(6), 40-47.