NCAV-to-Market


Benjamin Graham, professor and founder of value investing principles, was one of the first to consistently screen the market looking for bargain companies based on value factors. He didn't have databases such as ValueSignals at his disposal, but used people like his apprentice Warren Buffet to fill out stock sheets with the most important data.

Graham was always on the lookout for companies that were so cheap, that if the company went into liquidation, the proceeds of the assets would still return a gain.

The ratio he used to identify these companies was Net Current Asset Value or NCAV. This ratio is much more stringent compared to book value (total assets - total liabilities) and is calculated as follows:

NCAV = Current Assets - Total Liabilities

Current Assets = Cash & ST Investments + Inventories + Accounts Receivable

Graham was only happy if he could buy the company at 2/3 of the NCAV. That's the sort of margin of safety he was looking for.

This strategy was very successful during the years after Graham published it in his book 'Security analysis' in 1934 and also in more recent studies it has proven to provide superior results. A study done by the State University of New York to prove the effectiveness of this strategy showed that from the period of 1970 to 1983 an investor could have earned an average return of 29.4%, by purchasing stocks that fulfilled Graham's requirement and holding them for one year. Nowadays it's very difficult to find companies that meet Graham's criteria.

We calculate NCAV to Market as follows:

NCAV-to-Market Ratio = NCAV Market Cap

Our NCAV screen only selects companies with an NCAV-to-Market > 1.5.