Stocks Net Current Asset Value Per Share (NCAPS)

Net Current Asset Value Per Share (NCAPS) method of stock valuation helps in estimation of intrinsic value of stocks.

Net Current Asset method is a very conservative means to value a stock.

It was Benjamin Graham who made the concept of Net Current Asset (working capital) famous.

He wrote about it in his famous called “The Intelligent Investor”

He says, “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”.

What is net working capital?

Net Current Asset (NCA) = Current Assets – (Total Liabilities + Preferred Stock)

As a formula this may look like a simple thing, but for an investor its impact is huge.

A company whose market price is less than its NCA/share, it means it is trading at a hugely discounted price level.

Current Asset: Cash, Inventories, A/c Receivables, liquid investments etc.

Total Liability: Total Debt (preferred stock is also treated as a liability).

A stock which is trading at such price levels, it is as if it is available almost free of cost.

It is very likely that the market price of such a stock will increase dramatically in future.

Net Current Asset per share and undervalued stocks

Market Price < (less than) NCAPS ~ Means the stock is insanely undervalued.

Why Benjamin Graham think so?

Here the liquid asset base of the company is so high that it can pay for its total debt and any liability originating due to issue of preferential shares.

Just to show you as an example, how my stock analysis worksheet calculates Net Current Asset per share (NCAPS) of stocks:

Net Current Asset Per Share (NCAPS) -image

NCAPS = (Current Assets – Total Debt) / (Shares in issue- lakhs /100)

You will also note that the calculated NCAPS has also been discounted to 90% of its value.

This is done to build some “margin of safety”.

Market Price less NCAPS is already a great number, then why to discount it further?

I know, when I look for stocks for myself, Market price below NCAPS is more then enough for me.

But the value investing guru insists that the investors must incorporate the margin of safety in the calculated NCAPS.

If you will go by Warren Buffett, he would probably use the discounted value of 66.6% (two-third)

But for me 90% works quite well.

Net Current Asset Vs. Book Value

In relation to book value per share, Net Current Asset per share (NCAPS) is a more stringent metric for stock valuation.

I personally consider NCAPS as more reliable because it deals mainly with “positive effect of cash” and “negative impact of debt” on valuation of companies.

When one is dealing with book value per share, it does not consider debt in companies valuation.

Suppose two companies A & B has Book value per share of Rs.100 and Rs.50 respectively.

If market price of both A & B is Rs.1,000. Price to book value ratio will be as below:

  • A: Price/Book Value = Rs.10/share (1000/100)
  • B:Price/Book Value = Rs.20/share (1000/50)

This way, A looks better valued than B.

But consider this, total debt per share for A is Rs.60/share and for B is Rs.8/share.

In this case, the Net Book value (book value minus debt) will be as below:

  • Net Book Value (A) = Book Value – Debt = Rs.40 (100 – 60)
  • Net Book Value (B) = Book Value – Debt = Rs.42 (50 – 8)

Now the Price to net book value ratio will be as below:

  • A: Price/Net Book Value = Rs.25/share (1000/40)
  • B:Price/Book Value = Rs.23.8/share (1000/42)

This way, B looks better valued than A.

While calculating NCAPS, the negative impact of debt is considered.

Moreover, Cash is a more realistic representation of companies wealth as compared to book value.

The reason being, this wealth represents the hard cash.

In book value, the wealth that is represented is not as liquid as “Cash”.

Hence Net Current Asset value per share is like an acid test of stock valuation.

Having said that, it will also not be wrong to put it this way that, expecting market price to be less than NCAPS is a bit too much 

Though I use NCAPS in my stock valuation, I am yet to see a good stock which is trailing at such an exorbitantly low price levels.

But still I use it because it gives me a feel of stock valuation.

For me, NCAPS is the lowest that a share price of a good company will fall.

If I have to represent the intrinsic value of a company as a range, NCPAS will be the minimum value.

Net Current Asset Value Model Vs. Working Capital

Net current asset value model is not the same as Working Capital.

The confusion between NCA and Working Capital is understandable.

But this formula will clearly spell out the difference.

Net Current Asset = Current Asset – total debt.

Working capital = Current Asset – Current Liability

While dealing with working capital, investor is focusing only on the current liabilities.

While in NCAPS, investors is dealing with current liability plus total debt.

For me, unless a stock valuation model incorporate the negative effect of long term debt, it is not sufficient.

Hence in my stock analysis worksheet, I have used the NCAPS model to estimate the range of intrinsic value of stocks.

It also serves another purpose, a negative NCAPS tells me that this stock is not for me, why?

I love low debt companies.

Companies which has high debt, compared to its current liability, will show negative NCAPS.

So, NCAPS is my way to identifying companies with low debt levels.

Net Current Asset Per Share (NCAPS) of few Indian Stocks

(Updated: December’2017)

  1. RIL – -184.72
  2. TCS – 111.53
  3. ITC – 10.54
  4. Maruti – 132.11
  5. HUL – 22.92
  6. ONGC – 17.26
  7. INFOSYS – 131.1
  8. BHARTI AIRTEL – -134
  9. IOC – 43.48
  10. L&T – 171.67

Check this link to get NCAPS of 25+ Indian stocks in a tabulated form…

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  1. You mention about 90% discounting, but your ‘Stock analysis sheet’ uses the value of ‘99%’. Why is that so?

  2. Hi Mani,
    I want to understand that, the total debt includes as short term borrowings + long term borrowings from company’s balance sheet (If I am not wrong).

    1) I was also calculating the NCAPS for some companies and found NCAPS in negative value. Than how we can judge this?

    2) I am checking KEC international, its NCAPS as 3288.3 (Mar,19 as per your guidance) but its share price is only 275-277. How I can judge KEC at this point.

    Pl help me out if possible.

    • NCAPS is a very stringent method of estimating intrinsic value of stocks. A stock whose market price is below its NCAPS must be undervalued.

      For KEC, NCAPS can be calculated as shown below (based on Mar’19 data):

      – CA = 5,451.06
      – TL (Debt) = 1,521.76
      – NCA = 3,930 Crores
      – Shares = 25.7 Crores nos.
      – NCAPS = Rs152.91
      – Current Price = Rs.276

      • Hi Mani,
        Thanks for providing this important information. But Still I have a confusion.
        Acc to calculation as given by you in your article,
        NCAPS = 152.9 (3930/25.7)
        NCAPS (discounted 90%) = 137.61 (152.9*90%)

        Than how NCAPS = 70.39 comes out?

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