What is Net Current Asset Value Per Share (NCAVPS)?
Net Current Asset Value Per Share, or NCAVPS for short, is a financial metric for evaluating the attractiveness of a stock. It is a term that was pioneered by American economist, investor, and professor, Benjamin Graham, who is widely considered the “Father of Value Investing.” Therefore, NCAVPS is a metric used for fundamental value investors to compare companies.
NCAVPS is calculated by subtracting total liabilities (including preferred shares) from a company’s current assets and dividing by the number of shares outstanding.
History of Benjamin Graham
Benjamin Graham, born in 1894, was a very famous and influential investor who was a pioneer in driving the adoption of fundamental valuation through his research on finance and investing.
Fundamental analysis is the investing discipline that includes examining economic factors, financial statements, and competitive positioning to find the intrinsic value of a company. Then, making investments based on comparing the price a stock is trading at, and what the stock is worth intrinsically to the investor.
In 1949, Graham wrote a then-controversial book titled “The Intelligent Investor.” In the book, he advises investors to focus on key fundamental principles while ignoring the market “herd” and market noise that comes with the emotional daily market sentiment.
In addition, Graham inspired famous institutional investors, such as Warren Buffett, and the principles and formulas that Graham developed, such as NCAVPS, are still referenced nowadays.
Net Current Asset Value Per Share Explained
Benjamin Graham noticed that many investors place too much emphasis on earnings power and the earnings potential of companies when evaluating them. He believed that the asset value of companies was grossly overlooked. Therefore, Graham developed the concept of NCAVPS to compare with the current share price to find attractive valuations for stocks.
NCAVPS is basically the liquidation value of a company on a per-share basis. The liquidation value of a company is generally the value of the physical assets that can be sold less the liabilities that a company owes.
If a stock were priced below its NCAVPS, then intuitively, an investor can buy all the shares, liquidate the company, and realize a gain. Therefore, if the stock price is less than NCAVPS, Graham felt that the company was likely to be undervalued as long as it was not fundamentally flawed.
Graham instituted a rule in which he would only consider buying a stock if its current price was trading at lower than 66% of its NCAVPS.
A stock, Company ABC, just missed its consensus earnings estimates by a significant amount. It then went from trading at $25 per share to now only trading at $15 per share.
The company’s balance sheet is given below:
From the information above, is Company ABC undervalued based on the 66% rule?
1. First, we must calculate the NCAVPS, then compare it to the current share price.
The NCAVPS is calculated by subtracting total liabilities from current assets. It means that long-term assets and intangible assets like goodwill should be left out of the calculation.
Net Current Asset Value = Current Assets – (Current Liabilities + Long-Term Liabilities)
$50,000 – ($10,000 + $10,000) = $30,000
2. Then, by dividing by the number of shares, we arrive at the NCAVPS.
$30,000 / 1,000 Shares Outstanding = $30
3. Comparing the market price with the NCAVPS, we get:
$15 / $30 = 50%
Since 50% < 66%, we find that the stock of Company ABC is undervalued based on the 66% rule.
Limitations of NCAVPS
There is a limitation to comparing NCAVPS with the liquidation value of a company. Although the NCAVPS calculation may provide an estimated liquidation value of a company, the actual liquidation value is likely to be much different. It is because, in a liquidation, most assets will need to be sold quickly, and therefore, they are likely to be sold at less than market value and potentially less than the book value.
The value of assets and liabilities on the balance sheet is usually recorded at book value. If the assets are sold for less than their book value, the NCAVPS formula will overestimate the liquidation value of the company.
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