Net Current Asset Value Per Share (NCAVPS) is a metric created by Benjamin Graham, widely considered the father of value investing. The measure is designed to assess the attractiveness of a stock by evaluating the net current assets of a company on a per-share basis.
Definition of NCAVPS
NCAVPS is calculated by taking a company’s current assets, subtracting its total liabilities, and then dividing the result by the total number of outstanding shares. This formula helps investors identify stocks that are trading at a significant discount to their net current asset values.
NCAVPS Formula
The NCAVPS formula can be expressed mathematically as:
Where:
- Current Assets include cash, accounts receivable, and inventory.
- Total Liabilities encompass both current and long-term liabilities.
- Number of Outstanding Shares is the total number of shares currently held by shareholders, including restricted shares owned by company insiders and institutional holdings.
Historical Context of NCAVPS
Benjamin Graham introduced the concept of Net Current Asset Value Per Share in his seminal work, “Security Analysis,” published in 1934. He advocated for a conservative investment strategy that focused on acquiring stocks priced at or below two-thirds of their net current asset value to ensure a margin of safety.
Practical Significance
The NCAVPS metric is particularly useful for value investors searching for undervalued stocks. A stock trading below its NCAVPS indicates that the market is undervaluing the company’s assets, presenting a potential investment opportunity with a margin of safety.
Example Calculation
Consider a company with the following financials:
- Current Assets: $5,000,000
- Total Liabilities: $2,000,000
- Number of Outstanding Shares: 1,000,000
Using the NCAVPS formula:
If the stock is trading below $3.00, it may be considered an attractive investment based on Graham’s criteria.
Comparisons and Related Terms
- Book Value Per Share (BVPS): Similar to NCAVPS but includes both current and non-current assets.
- Price-to-Book Ratio (P/B Ratio): The market price per share divided by the book value per share.
- Intrinsic Value: The perceived or calculated value of a company based on fundamental analysis.
FAQs
Q: How does NCAVPS differ from Book Value Per Share (BVPS)?
A: NCAVPS focuses solely on current assets and total liabilities, excluding non-current assets, while BVPS includes the company’s total assets.
Q: Is NCAVPS relevant for all types of companies?
A: NCAVPS is particularly relevant for companies with significant current assets, such as those in the manufacturing or retail sectors, where liquid assets are crucial.
Q: Can a high NCAVPS indicate potential risk?
A: A high NCAVPS might indicate that a company is undervalued by the market. However, it’s essential to conduct further analysis to understand the reasons behind the undervaluation and assess any underlying risks.
Summary
Net Current Asset Value Per Share (NCAVPS) is a valuable tool for value investors, introduced by Benjamin Graham to assess the attractiveness of stocks at a discount to their net current asset values. By understanding and applying the NCAVPS formula, investors can identify potential opportunities with a margin of safety grounded in conservative investment principles.
References
- Graham, B., and Dodd, D. (1934). “Security Analysis.”
- Various financial literature on value investing and fundamental analysis.
Net Current Asset Value Per Share remains a timeless metric in the realm of value investing, providing a quantitative approach to identifying undervalued stocks based on their net current assets.
