Net current asset value
The net current asset value is a financial metric popularized by Benjamin Graham in his 1934 book Security Analysis. NCAV is calculated by subtracting a company's total liabilities from its current assets. Graham suggested a value investing strategy of buying a well-diversified portfolio of stocks that have a net current asset value greater than their market cap. This strategy is sometimes referred to as "cigar-butt" investing, because it tends to focus on struggling companies that are trading below their liquidation value.
Methodology
A company's net current asset value can be calculated as:Net Current Asset Value = Total Current Assets - Total Liabilities
And a company's market cap is calculated as:
Market Capitalization = Number of Shares Outstanding × Current Price per share
If NCAV > MC then the stock is considered undervalued.
Historical returns
United States stock market returns
A 1986 study found that a Ben Graham-style NCAV investing strategy outperformed the benchmark from 1971 to 1983. The NCAV strategy produced a return of 33.7% compared to 12.1% for the benchmark.A 2014 study found that the NCAV strategy produced an annualized geometric return of 24.7% from 2003 to 2010; the excess returns were unexplainable by either the capital asset pricing model or the Fama-French-Carhart model.