A comprehensive guide to Net-Net Valuation, a technique in value investing established by Benjamin Graham. Learn about its definition, working principles, and the formula used for calculation.
Net-Net Valuation is a value investing technique developed by Benjamin Graham, often regarded as the father of value investing. This method involves valuing a company based solely on its net current assets, disregarding long-term assets and liabilities. It hinges on the principle that such companies are undervalued and therefore present a buying opportunity for investors.
In Net-Net Valuation, the focus is strictly on the company’s liquid assets, specifically its current assets minus total liabilities. The essence of this technique is to identify stocks trading below their Net Current Asset Value (NCAV), which provides a “margin of safety” for the investor.
The formula for calculating Net Current Asset Value (NCAV) is straightforward:
If a company’s stock price per share is less than its NCAV per share, it may be considered a net-net investment opportunity.
Let’s consider a hypothetical company with:
Using the formula:
If the stock is trading below $3 per share, it may be a potential net-net investment.
Benjamin Graham introduced the Net-Net Valuation concept in the early 20th century as part of his broader value investing philosophy detailed in his books like “Security Analysis” and “The Intelligent Investor”.
While the technique was more prevalent during Graham’s era, it remains relevant today, particularly in bear markets or during economic downturns when more companies might trade below their NCAV.
Net-Net Valuation is a subset of value investing, where investors seek undervalued stocks based on intrinsic values.
While both consider asset values, the Price-to-Book Ratio looks at total asset values including fixed assets, unlike the NCAV which only considers current assets.