What is the net present asset value per share?
Net Present Asset Value Per Share (NCAVPS) is a measure created by Benjamin Graham as a means of measuring the attractiveness of a stock. A key metric for value investors, the NCAVPS is calculated by taking a company’s current assets and subtracting total liabilities.
Graham considered the preferred shares to be a liability, so they are also subtracted. This is then divided by the number of shares outstanding. The NCAV is similar to working capital, but instead of subtracting current liabilities from current assets, total liabilities and preferred shares are subtracted.
The NCAVPS formula is:
NCAVPS = Current Assets – (Total Liabilities + Preferred Shares) ÷ Outstanding Shares
- Benjamin Graham created net current asset value per share (NCAVPS), a measure that helps investors evaluate a stock as a potential investment.
- NCAVPS is a key metric for value investors and is obtained by subtracting a company’s total liabilities (including preferred shares) from its current assets and dividing the total by outstanding shares.
- By comparing the NCAVPS to the stock price, Graham believed investors could find undervalued stocks at a bargain price.
Understanding Net Present Asset Value Per Share (NCAVPS)
When examining industrial companies, Graham noted that investors often ignore asset values and instead focus on earnings. But Graham believed that by comparing the net current asset value per share (NCAVPS) to the price of the share, investors could find bargains.
Basically, the net present asset value is the liquidation value of a company. The liquidation value of a business is the total value of all its physical assets, such as fixtures, equipment, inventory, and real estate. It excludes intangible assets, such as intellectual property, brand recognition, and goodwill. If a business were to close and sell all of its physical assets, the value of these assets would be the liquidation value of the business.
Therefore, a stock that trades below the NCAVPS allows an investor to buy a company for less than the value of its current assets. And as long as the company has reasonable prospects, investors are likely to receive substantially more than they pay.
In addition to NCAVPS, Graham recommended other value investing strategies to identify undervalued stocks. One such strategy, defensive equity investing, means that the investor will buy stocks that provide stable earnings and dividends, regardless of what is happening in the stock market and the broader economy.
These “defensive stocks” are especially attractive because they protect the investor during times of recession, giving the investor a cushion to weather recessions in the markets. Examples of defensive actions can often be found in the consumer staples, utilities and health sectors. These stocks tend to perform better during a recession because they are not cyclical, which means that they are not highly correlated with business and economic cycles.
The bottom line
According to Graham, investors will benefit enormously if they invest in companies where stock prices do not exceed 67% of their NCAV per share.
However, Graham made it clear that not all stocks chosen using the NCAVPS formula would perform well and that investors should also diversify their positions using this strategy. Graham recommended having at least 30 shares.