Understanding Net Current Asset Value Per Share (NCAVPS)
Net Current Asset Value Per Share (NCAVPS) is a financial metric pioneered by the value investing maestro Benjamin Graham. The formula for understanding this metric is as intuitive as forgetting your keys inside a locked car: NCAVPS = (Current Assets - (Total Liabilities + Preferred Stock)) ÷ Shares Outstanding. Simply put, it measures a company’s liquid assets available per share after settling all its obligations.
Benjamin Graham, often dubbed the father of value investing, concocted this method to unearth stocks trading at prices less than their intrinsic liquidation values, essentially giving investors a sneak peek into potential sale items in the stock market bazaar.
Key Takeaways
- Inventor: Benjamin Graham, who notably enjoyed buying dollar bills for 40 cents.
- Formula: Current Assets minus the sum of Total Liabilities and Preferred Stock, all divided by the shares outstanding.
- Purpose: To identify potential bargain stocks that are traded below their calculated NCAVPS, potentially indicating undervaluation.
Special Considerations
When you grab stocks based on the NCAVPS, you’re essentially donning a financial detective hat, looking for clues of undervaluation that others might miss. Graham championed this metric as part of a broader strategy aimed at defensive stock investing — picking stocks resistant to economic hurricanes due to stable earnings and dividends.
Defensive Stocks and Why They Matter
Consider defensive stocks as the financial world’s canned goods—essential during economic downturns. These stocks, often in sectors like consumer staples or healthcare, offer consistency in dividends and performance, despite the rollercoaster rides in the broader market.
The Bottom Line
Graham’s magic number was 67%—if a stock’s market price was below 67% of its NCAVPS, it might just be a hidden gem in a sea of overpriced pebbles. However, even the sage of value investing advised spreading the bets across at least 30 stocks to decorate your portfolio with a diversified set of potential winners.
Related Terms
- Liquidation Value: The total worth of a company’s physical assets if it were to go out of business.
- Value Investing: An investment strategy where stocks are selected that appear underpriced by some forms of fundamental analysis.
- Defensive Stocks: Stocks providing consistent dividends and stable earnings regardless of the overall market condition.
Suggested Books for Further Study
- “The Intelligent Investor” by Benjamin Graham - Dive into the bible of value investing penned by the creator of NCAVPS himself.
- “Security Analysis” by Benjamin Graham and David Dodd - Enhance your understanding of assessing securities to find true value, which might just make you the Sherlock of the stock market.
Wrap up with these pearls of financial wisdom and perhaps, you can also create some bewitching investment brews, worthy of a finance wizard’s cauldron!
