- Net Current Asset Value Strategy: Is 30% Per Annum Returns Over 25 Years Possible?
- TL;DR: Grow Your Wealth With The NCAV Strategy
- Market Cap < ⅔ Net Current Asset Value
- Benjamin Graham: The Father Of Value Investing
- The NCAV Formula
- Market Capitalisation
- Net Current Asset Value
- NCAV = Current Assets – Liabilities
- How Does The NCAV Strategy Work?
- Performance Of The NCAV Formula
- Criticisms Of The Strategy
- Closing Thoughts
- Current Ratio Formula — Examples, How to Calculate Current Ratio
- Current Ratio Formula
- Example of the Current Ratio Formula
- Download the Free Current Ratio Formula Template
- Current Ratio Formula – What are Current Assets?
- Current Ratio Formula – What are Current Liabilities?
- Why Use the Current Ratio Formula?
- Additional resources
- Меры оценки производительности и ликвидности компании — COFU Trading
- Current Ratio
- Quick Ratio
- Working Capital to Sales
- Debt to Equity Ratio (D/E)
- Net Asset Formula | Step by Step Calculation of Net Assets with Examples
- Example #1
- Example #2
- Example #3
- Net Asset Calculator
- Relevance and Uses
- Recommended Articles
- Net Current Asset Value Per Share (NCAVPS): A Method To Value Stocks
- The Concept: Net Current Asset Value
- …why we say grossly undervalued?
- Calculation: Net Current Asset (NCA)
- Intrinsic Value: Net Current Asset Value Per Share
- What it means when we buy a stock at NCAVPS value?
- Limitation of Intrinsic Value? How to deal with it?
Net Current Asset Value Strategy: Is 30% Per Annum Returns Over 25 Years Possible?
Is there a simple and powerful investing formula that could make you rich?
That is the question I have been asking myself lately while diving deep into the literature surrounding Benjamin Graham’s Net Current Asset Value (NCAV) Strategy.
According to several studies, this strategy returned more than 30% per annum over 25 years.
For context, this turns a principal of $10,000 to over $7 million after 25 years.
Source: Friday | giphy
Disclaimer: Opinions expressed in the article should not be taken as investment advice. Please do your own due diligence.
TL;DR: Grow Your Wealth With The NCAV Strategy
The NCAV formula is very easy to implement.
All you need to do is buy shares that are trading at less than two-thirds of the net current asset value and hold them for a specified period.
Market Cap < ⅔ Net Current Asset Value
Sounds a bit too good to be true right?
But first, let’s try to understand the strategy and see if such returns can still be replicated in our portfolios.
Benjamin Graham: The Father Of Value Investing
You may not know who Ben Graham is, but you probably know his most famous student: Warren Buffet.
To say that Ben Graham’s work shaped the investment landscape today is an understatement.
His magnum opus, Security Analysis, which was written in 1934, is a required read for many value investors.
His other book, The Intelligent Investor, written in 1947, is perhaps the most popular investment-related book in the world.
The NCAV Formula
This super formula which I mentioned earlier was developed by Ben Graham in his book, Security Analysis.
One variation of the formula is this:
Market Capitalisation (Market Cap) is obtained by taking the number of shares outstanding and multiplying it by the share price.
Market Cap is one way to determine the size of the company relative to its peers.
Net Current Asset Value
Net Current Asset Value (NCAV) is calculated by taking Current Assets and deducting Liabilities.
NCAV = Current Assets – Liabilities
In case you’re wondering:
- Current Assets are cash and other assets that are expected to be converted to cash within a year. They are usually made up of Cash, Inventory, and Receivables. Inventory includes raw materials, components of products, incomplete products, as well as finished products. Receivables are mainly money that others owe to the company.
- Liabilities are simply what the company owes to other parties, which could include suppliers, employees and other parties that they do business with.
How Does The NCAV Strategy Work?
NCAV is simply an approximation of the liquidation value of a firm, or how much a firm is worth if it liquidates.
In a hypothetical liquidation, Current Assets of the firm (cash, inventory etc) are used to pay off all its liabilities (what the company owes).
Whatever value is left, would thus be what remains for the shareholders for the firm.
If a company’s market capitalisation is less than this liquidation value, it could mean that the shares are undervalued and that the share prices should increase over time.
As some investors have put, such companies would be worth more dead than alive.
Additionally, Ben Graham stipulated that the Market Cap should be less than two-thirds of this liquidation value. This was so that the investor would be provided with a margin of safety.
This safety buffer reduces the chances that we make a bad investment, while potentially increasing our returns.
This might go against the grain of the common wisdom that higher returns mean that you need to take higher risks, as you are taking less risk but with the potential for higher returns by applying a margin of safety.
For some of you who might have read our other articles, you might be wondering why we are not taking into account the fixed assets of a company.
Un current assets, fixed assets would be used or converted to cash more than a year later and are much less liquid.
These assets could include buildings, machinery, land, and even intangible assets. Although some of these assets can be sold off for cash, it would take much longer to do so and you most ly would need to sell them at a lower price.
Performance Of The NCAV Formula
This is probably the part that you are most excited about… multiple studies and back-tests have shown that this formula works exceedingly well.
Source: SpongeBob SquarePants | giphy
Tobias E. Carlisle, a famous deep value investor, back-tested this formula from 1983 to 2008, and found that it returned on average, 35.3%every year for 25 years. This would have turned $10,000 in 1983 to more than $18 million in 2008.
Another famous value investor, James Montier, conducted a back-test which purchased stocks from 1985 to 2007 in all developed markets globally and found that it returned an average of 35% as well.
Henry Oppenheimer, professor of finance at the State University of New York, similarly found an average return of 29.4% per year from 1970 to 1983. A $10,000 investment in this strategy would have increased to $285,197 within 13 years.
Combining this study with that of Tobias E, Carlisle, this would have returned almost 30% annually from 1970 to 2008, a period of 38 years. To illustrate, $10,000 invested in 1970 would have returned almost a mind-boggling $214 million by 2008.
Criticisms Of The Strategy
At this point, the sceptic in you might be screaming that this is too good to be true.
Indeed, this strategy, though championed by many strong proponents of value investors, has strong criticisms from other famous investors as well.
In fact, Warren Buffet has said that such a strategy is foolish and gave two criticisms:
- First, he argued that for these shares to be trading at such a large discount relative to its NCAV, the business fundamentals of the company would probably be bad.
- Second, he argued that the share prices might only start to rise much later only, and so you would be much better off investing in somewhere else first.
Seth Klarman, another famous value investor, had also warned that there are businesses which rapidly consumes their current assets. This means that the NCAV would deplete very quickly and that soon the share prices might not be trading at a discount to its NCAV.
James Montier, also found that the universe for net-net stocks globally is relatively few (median of 65 globally) and was concentrated in companies with very small market caps (median of US$21 million). This creates two issues:
- First, there may not even be enough stocks for you to invest in to reap the full benefits of the formula. Sure, you can invest in just a few stocks, but that would be quite risky as your portfolio would be very volatile. Even Ben Graham admitted that this was a flaw of the strategy and that he had a hard time finding such stocks that fit the criteria when the markets were doing well.
- Second, these small to micro-cap stocks tend to be very thinly traded with low liquidity, which would make it challenging and more expensive to invest in such stocks as compared to stocks from larger companies.
Additionally, you would need a cast-iron gut to trade these stocks as you would be essentially investing in companies you most ly would have never heard of and are not doing too well.
The strategy has also been found to be more volatile, so you would need to be disciplined and stick with the strategy despite wide swings in share prices.
Lastly, there is that famous phrase that past returns are not indicative of future results.
Famous investors such as Warren Buffet and Aswath Damodaran have criticised such strategies for not diving deep enough into a company’s fundamentals.
Some investors may also feel uncomfortable putting their money in shares just a simple formula, without much research or analysis.
Despite the many valid criticisms of Ben Graham’s NCAV investing, there are still many adherents of it who point to the multiple back-tested studies to prove the potency of the strategy. Indeed, this is one of the oldest investing strategies, dating back to 1934, with a track record of 85 years.
Ultimately, I do think that every investor needs to apply a strategy that best fits their risk appetite and financial goals. This strategy might have worked well for some investors, but it doesn’t mean we should all follow suit.
Professor Damodaran, known as the Dean of Valuation, suggested that apart from just mere financial analysis, we also need to have faith in our investment strategy. And for some of us, it is hard to find faith in a mere formula.
The NCAV strategy is only of many investing strategies that we can apply.
If you are interested in other investing strategies and stocks analyses, check out our Seedly blog and Seedly Q&A!
Current Ratio Formula — Examples, How to Calculate Current Ratio
The current ratio, also known as the working capitalNet Working CapitalNet Working Capital (NWC) is the difference between a company's current assets (net of cash) and current liabilities (net of debt) on its balance sheet.
It is a measure of a company’s liquidity and its ability to meet short-term obligations as well as fund operations of the business. The ideal position is to ratio, measures the capability of a business to meet its short-term obligations that are due within a year.
The ratio considers the weight of total current assetsCurrent AssetsCurrent assets are all assets that can be reasonably converted to cash within one year. They are commonly used to measure the liquidity of a company.
versus total current liabilitiesCurrent LiabilitiesCurrent liabilities are financial obligations of a business entity that are due and payable within a year. A company shows these on the balance sheet.
A liability occurs when a company has undergone a transaction that has generated an expectation for a future outflow of cash or other economic resources.. It indicates the financial health of a company and how it can maximize the liquidity of its current assets to settle debt and payables. The Current Ratio formula (below) can be used to easily measure a company’s liquidity.
Image: CFI’s Financial Analysis Fundamentals Course
Current Ratio Formula
The Current Ratio formula is:
Current Ratio = Current Assets / Current Liabilities
Example of the Current Ratio Formula
If a business holds:
- Cash = $15 million
- Marketable securities = $20 million
- Inventory = $25 million
- Short-term debt = $15 million
- Accounts payables = $15 million
Current assets = 15 + 20 + 25 = 60 million
Current liabilities = 15 + 15 = 30 million
Current ratio = 60 million / 30 million = 2.0x
The business currently has a current ratio of 2, meaning it can easily settle each dollar on loan or accounts payable twice. A rate of more than 1 suggests financial well-being for the company.
There is no upper-end on what is “too much,” as it can be very dependent on the industry, however, a very high current ratio may indicate that a company is leaving excess cash unused rather than investing in growing its business.
Download the Free Current Ratio Formula Template
Enter your name and email in the form below and download the free template now! You can browse All Free Excel TemplatesExcel & Financial Model TemplatesDownload free financial model templates — CFI's spreadsheet library includes a 3 statement financial model template, DCF model, debt schedule, depreciation schedule, capital expenditures, interest, budgets, expenses, forecasting, charts, graphs, timetables, valuation, comparable company analysis, more Excel templates to find more ways to help your financial analysis.
Current Ratio Formula – What are Current Assets?
Current assets are resources that can quickly be converted into cash within a year’s time or less. They include the following:
- Cash – Legal tender bills, coins, undeposited checks from customers, checking and savings accounts, petty cash
- Cash equivalentsCash EquivalentsCash and cash equivalents are the most liquid of all assets on the balance sheet. Cash equivalents include money market securities, banker's acceptances – Corporate or government securities with 90 days or less maturity
- Marketable securitiesMarketable SecuritiesMarketable securities are unrestricted short-term financial instruments that are issued either for equity securities or for debt securities of a publicly listed company. The issuing company creates these instruments for the express purpose of raising funds to further finance business activities and expansion. – Common stock, preferred stock, government and corporate bonds with a maturity date of 1 year or less
- Accounts receivableAccounts ReceivableAccounts Receivable (AR) represents the credit sales of a business, which are not yet fully paid by its customers, a current asset on the balance sheet. Companies allow their clients to pay at a reasonable, extended period of time, provided that the terms are agreed upon. – Money owed to the company by customers and that is due within a year – This net value should be after deducting an allowance for doubtful accounts (bad credit)
- Notes receivableNotes ReceivableNotes receivable are written promissory notes that give the holder, or bearer, the right to receive the amount outlined in an agreement. Promissory notes are a written promise to pay cash to another party on or before a specified future date. If the note receivable is due within a year, then it is treated as a current asset on the balance sheet. – Debt that is maturing within a year
- Other receivables – Insurance claims, employee cash advances, income tax refunds
- InventoryInventoryInventory is a current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a company has accumulated. It is often deemed the most illiquid of all current assets — thus, it is excluded from the numerator in the quick ratio calculation. – Raw materials, work-in-process, finished goods, manufacturing/packaging supplies
- Office supplies – Office resources such as paper, pens, and equipment expected to be consumed within a year
- Prepaid expensesPrepaid ExpensesPrepaid expenses represent expenditures that have not yet been recorded by a company as an expense, but have been paid in advance. In other – Unexpired insurance premiums, advance payments on future purchases
Current Ratio Formula – What are Current Liabilities?
Current liabilities are business obligations owed to suppliers and creditors, and other payments that are due within a year’s time. This includes:
- Notes payableNotes PayableNotes Payable are written agreements (promissory notes) in which one party agrees to pay the other party a certain amount of cash. Alternatively put, a note payable is a loan between two parties. See required elements of a note and examples. – Interest and the principal portion of loans that will become due within one year
- Accounts payableAccounts PayableAccounts payable is a liability incurred when an organization receives goods or services from its suppliers on credit. Accounts payables are expected to be paid off within a year’s time, or within one operating cycle (whichever is longer). AP is considered one of the most liquid forms of current liabilities or Trade payable – Credit resulting from the purchase of merchandise, raw materials, supplies, or usage of services and utilities
- Accrued expensesAccountingOur Accounting guides and resources are self-study guides to learn accounting and finance at your own pace. Browse hundreds of guides and resources. – Payroll taxes payable, income taxes payable, interest payable, and anything else that has been accruedAccrual AccountingIn financial accounting, accruals refer to the recording of revenues that a company has earned but has yet to receive payment for, and the for but an invoice is not received
- Deferred revenueDeferred RevenueDeferred revenue is generated when a company receives payment for goods and/or services that it has not yet earned. In accrual accounting, revenue is only recognized when it is earned. If a customer pays for good/services in advance, the company does not record any revenue on its income statement and instead records a – Revenue that the company has been paid for that will be earned in the future when the company satisfies revenue recognitionRevenue RecognitionRevenue recognition is an accounting principle that outlines the specific conditions under which revenue is recognized. In theory, there is a wide range of potential points at which revenue can be recognized. This guide addresses recognition principles for both IFRS and U.S. GAAP. requirements
Why Use the Current Ratio Formula?
This current ratio is classed with several other financial metrics known as liquidity ratios.
These ratios all assess the operations of a company in terms of how financially solid the company is in relation to its outstanding debt.
Knowing the current ratio is vital in decision-making for investors, creditors, and suppliers of a company. The current ratio is an important tool in assessing the viability of their business interest.
Other important liquidity ratios include:
- Acid-Test RatioAcid-Test RatioThe Acid-Test Ratio, also known as quick ratio, is a liquidity ratio that measures how sufficient a company's short-term assets can cover current liabilities
- Quick RatioQuick RatioThe Quick Ratio, also known as the Acid-test, measures the ability of a business to pay its short-term liabilities with assets readily convertible into cash
Below is a video explanation of how to calculate the current ratio and why it matters when performing an analysis of financial statementsAnalysis of Financial StatementsHow to perform Analysis of Financial Statements. This guide will teach you to perform financial statement analysis of the income statement,.
Video: CFI’s Financial Analysis Courses
Thank you for reading this guide to understanding the current ratio formula. CFI is the official global provider of the Financial Modeling & Valuation Analyst (FVMA)®FMVA® CertificationJoin 350,600+ students who work for companies Amazon, J.P. Morgan, and Ferrari designation. To keep educating yourself and advancing your finance career, these CFI resources will be helpful:
- Quick Ratio TemplateQuick Ratio TemplateThis quick ratio template helps you calculate the quick ratio given the amount of cash, marketable securities, accounts receivable and accounts payable. The Quick Ratio, also known as the Acid-test or liquidity ratio, measures the ability of a business to pay its short-term liabilities by having assets that are readily
- Net Asset LiquidationNet Asset LiquidationNet asset liquidation or net asset dissolution is the process by which a business sells off its assets and ceases operations thereafter. Net assets are the excess value of a firm’s assets over its liabilities. However, the revenue generated by the sale of the net assets in the market might be different from their recorded book value.
- Liquidation Value TemplateLiquidation Value TemplateThis liquidation value template helps you compute the liquidation value given a company's total liabilities and assets in auction value. Liquidation value is an estimation of the final value which will be received by the holder of financial instruments when an asset is sold, typically under a rapid sale process. A busi
- What is financial modeling?What is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model.
Меры оценки производительности и ликвидности компании — COFU Trading
Все меры оценки ликвидности и производительности компаний считаются на основе двух документов: бухгалтерского баланса и отчета о прибыли компании.
Но перед тем как перейти к описанию этих мер, необходимо сначала разобраться с терминами.
Я не буду сильно углубляться в пояснения этих двух документов, просто опишу их составляющие, как они называются на русском и английском языках, чтобы в дальнейшем было проще искать данные по компаниям в интернете.
Упрощенно бухгалтерский баланс можно отобразить в виде схемы, изображенной на рисунке.
Fixed assets (FA) — основные средства компании:
- Нематериальные активы (intangibles) — то, что не имеет физического присутствия, например «goodwill».
- Чистые основные средства (net fixed assets) — большие, дорогие физические объекты, такие как недвижимость.
- Инвестиции (investments) — часто это акции других компаний.
Current Assets (CA) — оборотные активы, т.е. те активы, которые обернутся в кэш быстрее чем за 12 месяцев:
- запасы (stocks, inventories) — сырые материалы, конечный продукт, и т.п.
- дебиторская задолженность (account receivable) — деньги, полученные с продаж товаров.
- денежные средства (cash) — обычно это небольшие суммы, т.к. у компаний нет целей просто держать большие суммы в виде наличных. Но высокий уровень кэша может свидетельствовать о намерениях совершения больших покупок, например покупки другой компании.
- все остальное (miscellaneous).
Owners Funds (OF) — Акционерный капитал (деньги владельцев компании):
- обыкновенные акции (issued common stocks) — основной способ привлечения денег в бизнес.
- резервы капитала (capital reserves) — доходы от не торговой деятельности (разница курсов валют в торговом балансе, переоценка фиксированных активов, премии акций, выпущенных по цене выше номинальной).
- нераспределенная прибыль (revenue reserves) — дивиденды держателям акций и т.п.
Long-Term Loans (LTL) — долгосрочные займы (более чем на один год).
Current Liabilities (CL) — краткосрочные обязательства — все то, что должно быть выплачено в течение года: налоги, дивиденды, оплата за сырье и т.п.
Total Assets (TA) — сумма всех активов или сумма всех пассивов.
Capital Employed (CE) — используемый капитал.
CE = OF + LTL = FA + CA — CL.
Net Worth (NW) — то что принадлежит владельцам компании, т.е. берем все активы компании и вычитаем все обязательства перед третьими лицами.
NW = FA + CA — CL — LTL = OF.
Working Capital (WC) — является мерой ликвидности, т.е. мерой доступности кэша для покрытия текущих нужд компании.
WC = CA — CL = OF + LTL — FA.
Вычитая операционные расходы из продаж компании, мы получаем EBIT — грубо говоря это доход перед уплатой всех обязательств. После чего мы последовательно получаем еще несколько показателей, таких как EBT, EAT и RE. Все пояснения на картинке, не будем на этом останавливаться.
Сочетая EBIT, EBT и EAT с TA, CE и NW в разных комбинациях, мы получаем разные меры оценки производительности компании. Самые важные из них — это ROTA и ROE.
Отражает эффективность всей компании, так как учитываются абсолютно все показатели.
Return on Total Assets (ROTA) = EBIT/TA
Еще один способ определения
ROTA = Profit Margin * Asset Turn,
где Profit Margin (Gross Margin) = EBIT/Sales
Asset Turn = Sales/TA
Если Asset Turn = 2.00, это означает, что для поддержания продаж на 1$ необходимо 1/2.00 = 0.5$.
Если Asset Turn = 0.4, это означает, что для поддержания продаж на 1$ необходимо активов на 1/0.4 = 2.5$, что очень много.
Выгоднее инвестировать и иметь бизнес с показателем Asset Turn = 2.00, чем с 0.4.
Для роста ROTA необходимо либо снижать издержки, которые влияют на показатель Profit Margin через EBIT, либо понижать TA, который влияет на Asset Turn. Таким образом, можно предположить, что снижение индекса цен производителей (PPI), приведет к росту ROTA компаний, закупающих сырье для своего производства.
Чем выше значения Sales Margin и Asset Turn, тем больше возврат для держателя акций такой компании.
Эффективность для держателей акций (владельцев компании). Это самый важный показатель эффективности бизнеса. Основным двигателем ROE является ROTA.
Return on Equity (ROE) = EAT/OF
Важно понимать, что очень высокие значения ROE и ROTA не могут держаться долго, так что в компаниях с высокими значениями можно ожидать их снижение.
ROE «управляет» стоимостью компании. Да, этот показатель является краткосрочной характеристикой, но из всех индикаторов он самый важный.
Инвесторы покупают «будущую стоимость» компании. Если перспективы роста хорошие, это обещает хорошую прибыль. Однако есть и риски, поэтому инвесторы оценивают перспективы по следующей схеме:
1. оценка экономики вцелом;
2. оценка секторов (индустии);
3. оценка конкретной компании.
Основными показателями, которые влияют на ROE, являются ROTA и Debt/Equity Ratio.
Меры оценки ликвидности компании читаются на основе бухгалтерского баланса. Норма для всех индикаторов ликвидности постоянно меняется со временем, здесь присутствуют тренды, нежели абсолютные значения.
Это соотношение показывает доступность средств у компании для покрытия краткосрочных обязательств. Значение выше единицы считается хорошим. Но некоторые предприятия могут чувствовать себя хорошо и при значениях меньших единицы.
Current Ratio = [Current Assets] / [Current Liabilities]
Смотреть на это индикатор в изоляции смысла нет, необходимо смотреть на него в контексте. Кроме этого, нужно сравнивать его с бенчмарком, который можно взять из различных источников:
- посчитать на основе исторических данных;
- сравнении с конкурентами;
- уже готовые расчеты в публикациях и исследованиях.
Quick Ratio = [Current Assets — Inventories] / Current Liabilities
В данном случае мы исключаем из расчетов запасы, так как это показатель ликвидности, а у некоторых компаний могут возникнуть трудности с преобразованием запасов в наличку. Например, танкер с нефтью, который стоит в порту, проще перевести в кэш, чем такой же танкер с одеждой.
50% компаний индекса SnP500 попалает в диапазон [0.5 … 1.1]. Значение Quick Ratio = 1.0 — это очень хороший показатель, но большинство компаний считает, что нет смысла в таком уровне ликвидности.
Если Current Ratio стабилен, а Quick Ratio сильно падает — это плохой знак. Это означает, что запасы накапливаются за счет наличных и денежных поступлений.
Current Ratio и Quick Ratio — самые популярные индикаторы ликвидности, но у них есть недостаток — они актуальны на дату формирования бухгалтерского отчета. Существует другой индикатор, который может быть более полезным в определении того, способна ли компания в моменте заплатить по всем обязательствам. Он называется «Working Capital to Sales».
Working Capital to Sales
Это более динамичный индикатор, по которому можно отслеживать тренды, т.к. в его основе лежат данные из PnL отчета компании.
Working Capital to Sales Ratio = [Current Assets — Current Liabilities] / Sales
Если продажи компании растут, то Working Capital to Sales Ratio падает. Это может происходить, если компания растет слишком быстро, или если в ней изначально было недостаточно денег. В любом случае повышается риск банкротства. Выходом из такой ситуации может быть инъекция так называемых Long-term Liquid Funds.
Debt to Equity Ratio (D/E)
Это один из самых фундаментальных показателей. Есть три способа его расчета:
используя только долгосрочные займы;
долгосрочные + краткосрочные займы;
долгосрочные + все обязательства.
Самый популярный — второй способ, но автор книги, на основе которой написана эта статья, предпочитает использовать все обязательства в расчете. Но в принципе разницы нет как считать.
Есть так же несколько методов подсчета D/E:
D/E = [LTL + STL] / OF
D/E = [Total Debt] / [Total Funds] = [LTL + CL] / [LTL + CL + OF]
Первый метод самый популярный, но второй удобнее, так как он отражает долг в процентом соотношении ко всем активам компании.
Чем выше уровень долга компании, тем выше риски этой компании, ей необходимо выплачивать проценты по долгам, а это создает исходящий денежный поток из компании. Но зачем компании берут сверх риск? Наращивая долг, они увеличивают свою доходность, так растет стоимость их акций, растет доход владельцев компании и увеличивается потенциал для будущего роста компании.
Нормальное значение уровня долга зависит от сектора. В компаниях с предсказуемым доходом (например лизинг) уровень долга выше, чем у компаний с волатильным доходом (например, добыча полезных ископаемых).
Рост долга с одной стороны приводит к росту доходов держателей акций, но с другой стороны повышает риски для компаний.
За счет повышения долга можно завышать показатель ROE. Ниже приведены примеры с нулевым долгом и с D/E = 20% (при процентной ставке 10%).
Увеличение плеча повышает доходность (ROE), но и риски повышает тоже. И чем выше Debt, тем выше ROE. Поэтому важно понимать, что высокий ROE компании может быть сопряжен с высоким долгом (риском).
Незначительный рост процентных ставок приводит к снижению ROE. При росте ставок EBT компаний падает, и тогда ROE будет падать быстрее у тех компаний, у которых D/E выше.
Net Asset Formula | Step by Step Calculation of Net Assets with Examples
Net Assets can be defined as the total assets of an organization or the firm, minus its total liabilities. The number of net assets can be tallied out with the shareholder’s equity of a business. One of the easiest ways to calculate net assets is by using the below formula.
Net Assets = Assets – Liabilities
The calculation of Net Assets is quite simple and is easy to understand. We need to cover below three steps, and then we will have Net Asset value.
- Step 1: First, we need to calculate the total of assets, which is the right side of the balance sheet. One can also take a total of assets, or if only trial balance is available, then we need to add assets one by one and then have a grand total of assets.
- Step 2: After step 1, we can, in a similar fashion, calculate the total of liabilities that the firm is required to pay or is obliged somewhere in the future. step 1, one can add line by line liabilities and get a total of liabilities. Total liabilities can include total borrowings, provisions, current, and other non-current liabilities.
- Step 3: In the last step, we need to just deduct the total calculated in step 1, which is total assets from total liabilities, which was calculated in step2.
PQR Ltd is in a stage of finalizing its books of accounts, and the MD of the company wants to know what their net asset is. Below is the information extracted from their trial balance; you are required to calculate Net Asset.
So, the calculation of net asset can be done as follows.
Well, this is a straight forward example of calculating net assets.
Net Assets = $10,500,000 – $5,500,000
Net Asset will be –
Net Assets = $5,000,000
Hence, the Net assets of PQR ltd are $5,000,000.
HDFC bank one of the leading banks in the industry and one of the best banks operating in India. Sam, who is a lead analyst at CRISIL, is looking for a new opportunity, and one of the criteria for stock screeners is that the company’s net asset should not be negative nor zero.
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Below extract from BS (reported in cr.) for the period ended 2018.
You are required to assess whether an above stock will make up in Sam’s screener list?
Here we are given a few variables from the liabilities side and few variables from the asset side. First, we need to calculate total assets and then total liabilities.
Step 1: Calculation of Total liabilities
Step 2: Calculation of Total assets
Step 3: We can use the above equation to calculate net assets:
Net Assets = 11,03,232.77 – 9,93,633.64
Net Assets will be –
Net Assets = 1,09,599.13
Therefore, the net assets of the HDFC bank for March 2018 were 1,09,599.13, which would compromise equity and reserves.
Kedia broker and the company are following TATA motors, one of the listed companies of NSE. TATA motors have been recently suffering from decline sales of its most sold product Jaguar Land Rover, and hence its shares have been declining since then. Aman, who is working at Kedia LTD., wants to know the net assets of the company first.
You are required to calculate the net assets of the company.
Here we are given a few variables from the liabilities side and few variables from the asset side. First, we need to calculate total assets and then total liabilities.
Step 1: Calculation of Total liabilities
Step 2: Calculation of Total assets
Step 3: We can use the above equation to calculate net assets:
Net Assets = 3,52,882.09 – 2,57,454.18
Net Assets will be –
Net Assets = 95427.91
Therefore, the net assets of the TATA motors for March 2018 were 95,427.91, which would compromise equity and reserves.
Net Asset Calculator
You can use the following Net Asset Calculator
|Net Asset Formula =||Assets – Liabilities|
|0 – 0 =||0|
Relevance and Uses
Assets net of the total liabilities will net to the owner’s equity.
Essentially, the shareholders or the stockholders of the firm or the company or the business owns the assets which shall not have outstanding loans. This would be the same as home with a mortgage loan upon it.
The equity or the net assets in the home is the value of the home and subtracting the outstanding mortgage loan. Net assets are a similar concept.
If desired, owners can increase their net assets in a few several ways. They can make new investments in the firm or in the company, or the management or the owners can simply leave excess profits in the bank account of the company rather than calling for distribution or dividend.
If owners or shareholders or stockholders withdraw money business say in the form of a distribution or dividend, their nets assets shall decrease.
The ratio of liabilities to total assets shall go up as the owners took out the cash, which is part of an asset, from the firm or the business.
This has been a guide to Net Asset Formula. Here we discuss how to calculate net assets using its formula along with practical examples and downloadable excel template. You can learn more about excel modeling from the following articles –
Net Current Asset Value Per Share (NCAVPS): A Method To Value Stocks
If you to estimate intrinsic value of a stock, then start with Net Current Asset Value Per Share (NCAVPS). Why? Because it is the easiest to calculate and is most reliable of all. Yes, for me it is even more reliable than DCF method.
But the big problem with NCAVPS method is that, its estimates are so low that, it is impossible to find good stocks trading at NCAVPS levels. So why to use it? Because it gives us a feel about the stock’s intrinsic value.
Though intrinsic value should always be ONE number. But this is true for magic investors Warren Buffett. For common men us, intrinsic value is a range. It has a lower limit and an upper limit.
We would to buy stocks which falls in between this range, and this is where NCAVPS comes in. It helps us to calculate the intrinsic value’s lower limit.
Who made the concept of NCAVPS popular? Benjamin Graham…
The Concept: Net Current Asset Value
The concept of Net Current Asset Value Per Share (NCAVPS) was coined by Benjamin Graham. Here are the words of Benjamin Graham related to “Net Current Asset Value” picked from his book The Intelligent Investor Chapter 7, Page 169.
“….the type of bargain issue that can be most readily identified is a common stock that sells for less than the company’s net working capital alone, after deducting all prior obligations.
This would mean that the buyer would pay nothing at all for the fixed assets— buildings, machinery, etc., or any good-will items that might exist.
Very few companies turn out to have an ultimate value less than the working capital alone…”
“Net Working Capital” for Benjamin Graham is what is “Net Current Assets” for us. In terms of formula Graham’s Net Working Capital looks this:
Net Working Capital = Current Assets – (current liability + long term debt + preference shares)
Now we understand what Benjamin Graham means by Net Working Capital (Net Current Asset). Let’s also know what he means by “..bargain issue….that sells for less than the company’s net working capital“. In layman terms, this statement of Ben Graham can be represented as below:
When a stock is trading at a price so low that its total market capitalisation is less than its net current asset, in this case we can say that the stock is grossly undervalued.
A stock which is trading at such price levels, it is as if it is available almost free of cost. It is very ly that the market price of such a stock will increase dramatically in future.
…why we say grossly undervalued?
Generally speaking, any company is made up of its assets. These assets can be fixed assets land, building, machinery, capital work-in progress, patents, furnitures, automobiles, etc. The assets can also be relatively liquid called current assets cash, short term investments, receivables, inventories etc.
In the above example (RIL) you can note that the proportion between fixed assets and current assets is 82% vs 18% respectively. Just keep this in mind that, for a typical manufacturing company, ratio between current assets and total assets is 1:5.
Now, what Benjamin graham says is to reduce the weight of current assets further. How? By adjusting it for current liabilities, long term debt and preferential shares if any. After this what’s left on current asset is called “Net Current Asset” to him. Let’s see how this looks in our ‘total asset’ vs ‘current asset’ graphics:
Why grossly undervalued? This is because when an investor pays only for net current assets, he/she is not paying for the fixed assets. The investor is able to buy the whole company at the rate of net current asset. This is a phenomenal price.
Imagine it this: you are able to buy a prime residential property by paying only for the master bed-room. This will be a great buy, right?
I hope you have understood the concept of net current asset valuation of stocks, and why it is so hard to find good stocks trading at such price levels. Now let’s learn how to calculate NCA from financial reports.
Calculation: Net Current Asset (NCA)
What you see here is a snapshot of NCAVPS sheet of my stock analysis worksheet. Seeing this you can easily visualize how Net Current Asset Value (NCAV) is computed from several numbers in the balance sheet.
- Current Asset: First step is to fetch the current asset numbers. This value is available in the company’s balance sheet. In our example stock, current asset for Mar’20 is showing as Rs.1,687 crore.
- Current Liability: Second step is to get current liability data from company’s balance sheet. Current liability along with other debts and obligations will form total liability.
- Long Term Borrowings: All loans whose tenure is longer than 12 months falls under this category. Short term loans are part of current liability. This value is also available in balance sheet. In our example stock, for Mar’20, this value is zero.
- Preference Shares: Not many company’s issue these shares. According to me, 90% companies issue only common shares. But for company’s which has issued preference shares, this value must be subtracted from current assets to arrive at NCAV. This value is also available in balance sheet.
Once you have all these numbers, use the formula shown in the above graphics to calculate ‘Net Current Asset’.
Intrinsic Value: Net Current Asset Value Per Share
What we have seen till now is the calculation method of ‘net current asset value’. But how to convert this value into intrinsic value? How to know if a stock is undervalued or overvalued?
Calculation of Net Current Asset Value is 99% job done. What’s remaining is only mere aesthetics worth. This will eventually help us to draw a conclusion. Let’s see what we have to do more:
There are two ways of approaching the case:
- Market Cap Method: Net Current Asset Value (NCAV) computed as shown above is actually the intrinsic value of the company. Compare the NCAV with the total market cap of the company. If the market cap is less than NCAV, then we can say that the company is extremely undervalued (read the limitations).
- Market Price Method: Pick the ‘number of shares outstanding’ from the company’s financial reports. Divided the calculated NCAV with the ‘number of shares outstanding’. The value you get is called Net Current Asset Value Per Share (NCAVPS). This is the intrinsic value. Compare it with current price of the company to know if stock is undervalued or overvalued.
What it means when we buy a stock at NCAVPS value?
This is another explanation of why a stock trading at NCAVPS levels is said to be grossly undervalued.
Suppose you bought a company’s stocks which was trading at a price equivalent to its NCAVPS levels. Due to some reasons, after few months from the purchase date, the company decided to wind-up its operations. What will happen to the shareholders?
When a listed company winds up its operations what it will do is to start liquidating all its assets. Upon liquidation, whatever funds is collected will be used to pay-off all the liabilities/payables. The balance amount which is left after paying all liabilities, will be distributed proportionally among the shareholders.
Let’s understand this concept using our graphics.
You can see, purchase price was Rs.18 per share. After liquidation, amount received by the shareholders is Rs 47 per share. There is a gain even though the company got liquidated.
You must also note that, during liquidation following two thigs are also happening:
- Fixed Assets: These are sold at a throw away price of almost 50% of the book value.
- Current Assets: These are liquidated at 90% of the market value.
This is what is called distressed selling. Even though the assets are sold at such price levels, still the shareholder is not at loss. Their gain is Rs.29 per share (Rs.17 to Rs.47).
What made this possible? It was possible because the shareholder bought the share at market price equivalent to NCAVPS.
What is shown above is an extreme case of company shutting down its operations. In normal circumstances, stocks of a good company, trading at NCAVPS levels, will record steep price appreciation soon in future.
Limitation of Intrinsic Value? How to deal with it?
If NCAVPS is such a strong indicator of undervaluation, why it is not such a popular metric among shareholders? There are two reasons for it:
- Rare to Locate: Yes, it is almost impossible to locate a good company trading at such low price levels (below NCAVPS). Hence it is not so popular.
- Earning Quality: It is not enough to compare only NCAVPS with market price. It is also necessary to look at earnings. A company which has been reporting losses for last 5 years, may trade at NCAVPS levels. But shall be buy such stocks? Not at all.
So, in order to prevent one self from buying a dead-beat stock, better is to have another financial metric in our pocket for double checking. This metric is called Return on Asset (ROA).
Check last 5 years ROA of the company. If they are positive and growing, still the market price is below NCAVPS, it becomes a good buy. Though further fundamental analysis must be done. How to do it? I do it using my stock analysis worksheet.
But if it is so rare to find a stock at NCAVPS price levels, why to bother going into its calculations? If we will try to locate NCAVPS stocks in “high, and mid cap, blue chip” category, we may never find it. But there is a fair possibility to find such stocks in small cap space.
Remember: Idea is to find a fundamentally strong stock trading at NCAVPS price levels.
It may take time for investors to identify shares which are trading at NCAVPS price levels. But once done, its benefit is unquestionable. But the investor must not forget about the limitation of NCAVPS, and how to manage it.
Typically, what to look for in a stock that will have a high ‘Net Current Asset Value Per Share’? First of all, it must be a cash rich company. Secondly, it must be a very low debt company. These characteristics will keep the company’s NCAV high.
My stock analysis worksheet uses NCAVPS as the first metric to estimate intrinsic value of stocks. But as NCAVPS has its limitations, hence other valuation models are use for practical purposes.
I hope you d the article on Net Current Asset Value Per Share. It is a simple concept, but I’ve tried to explain it in a way that lots of other concepts also become clear. Please give me your feedback by posting your views in the comment section below.
Thanks and happy investing.