Net Current Asset Value (NCAV): What It Is & How to Use It

Net Current Asset Value (NCAV) is a valuation metric developed by investor Benjamin Graham. Graham introduced this concept in his 1934 book, Security Analysis, as a way to identify deeply undervalued companies. The core idea is to determine a company’s value based on its current assets compared to all of its liabilities. This approach offers a conservative estimate of a company’s liquidation value, representing the cash left for shareholders if the business sold its liquid assets and paid off all debts.

Calculating Net Current Asset Value

The calculation for Net Current Asset Value is: NCAV equals Current Assets minus Total Liabilities. These figures are found on a company’s balance sheet, a financial statement included in quarterly (Form 10-Q) and annual (Form 10-K) reports. Current assets are resources the company expects to convert into cash within one year, including cash, marketable securities, accounts receivable, and inventory.

The formula uses total liabilities, a figure that includes not only short-term obligations but also all long-term debt. Some interpretations also subtract the value of any preferred stock from current assets, as preferred shareholders have a higher claim than common shareholders in a liquidation.

To make this figure useful for investment analysis, it must be converted to a per-share basis by dividing the total NCAV by the number of common shares outstanding. For example, if a company has $100 million in current assets, $60 million in total liabilities, and 10 million shares outstanding, its NCAV is $40 million ($100M – $60M), and its NCAV per share is $4.00 ($40M / 10 million shares).

Interpreting the NCAV Figure

When a company’s stock price is trading for less than its NCAV per share, it suggests an investor can purchase a stake in the business for less than the value of its net current assets. In this scenario, all of the company’s long-term assets—such as property, plants, and equipment—are acquired for free. This creates a buffer against potential losses, a concept Graham termed the “margin of safety.”

This margin of safety provides protection if the company’s future performance is poor or if the analyst’s valuation is slightly off. Graham recommended seeking stocks trading at a substantial discount to their NCAV, often suggesting a price of two-thirds of the NCAV per share or less. For a stock with an NCAV per share of $15, this would imply a target purchase price of $10 or below.

Warren Buffett described this strategy as “cigar butt” investing, referring to finding a discarded cigar with one free puff left in it. An NCAV stock may belong to a struggling company, but buying it at a deep discount provides the potential for profit as the market corrects the pricing discrepancy.

Refining the NCAV Calculation

A more rigorous analysis involves making adjustments to the current assets figure, as the book value may not reflect its true recoverable value in a quick liquidation. Investors often apply discounts to certain asset categories to create a more conservative valuation. A common refinement is to discount accounts receivable, perhaps counting only 75% of receivables, acknowledging that a portion of customers may default.

Inventory is often discounted more heavily, perhaps to 50% of its stated value, because it might have to be sold at a steep discount or could be obsolete. Cash and marketable securities are valued at or near 100% of their stated value. For instance, a company with $20 million in cash, $40 million in receivables, and $50 million in inventory would have its adjusted current assets calculated as ($20M 1.0) + ($40M 0.75) + ($50M 0.50), which equals $75 million, rather than the initial $110 million.

Investors should also scrutinize financial statement footnotes for any off-balance-sheet liabilities, such as pending litigation or loan guarantees, that could represent additional claims on the company’s assets.

Finding Potential NCAV Investments

Identifying companies for an NCAV investment is most efficiently done using online stock screeners. These tools, offered by financial data websites and brokerage platforms, filter companies based on specific financial metrics. An investor can screen for companies where the market capitalization is less than the Net Current Asset Value, using the criteria “Market Capitalization < (Current Assets - Total Liabilities)." Some advanced screeners may even allow for the refined formula with custom discounts for receivables and inventory. This screened list is only a preliminary step and not a buy list, but a pool of companies requiring further due diligence. The next action is to manually inspect the most recent balance sheet (Form 10-Q or 10-K) for each company. This manual check verifies the screener's data, allows the investor to apply their own refined calculations, and helps uncover qualitative factors the screener cannot assess.