# Net-Net Investing: Definition, Strategy, and NCAVPS Formula Explained

## What Is Net-Net?

Benjamin Graham's Net-Net investing strategy evaluates a company's stock using net current assets per share (NCAVPS) to uncover undervalued opportunities. This approach emphasizes cash and cash equivalents, deducts adjustments for accounts and inventories, and excludes long-term assets, focusing purely on immediate liquidation values. Understand this method for identifying investment prospects within undervalued stocks.  

### Key Takeaways

*   Net-net is a value investing strategy pioneered by Benjamin Graham that focuses on a company’s net current assets, excluding long-term assets and liabilities.  
    
*   The strategy identifies stocks trading below 67% of their net current asset value per share as potentially undervalued investments.  
    
*   Critics argue the net-net approach is less reliable for long-term investments, as it neglects deeper company issues that could affect future performance.  
    
*   Net-net investing was more common when financial information was harder to access, but advances in data collection have made more comprehensive analyses feasible.

## How Net-Net Investing Works

Graham used this method at a time when financial information was not as readily available, and net-nets were more accepted as a company valuation model. When a viable company is identified as a net-net, the analysis focused only on the firm’s [current assets](https://www.investopedia.com/terms/c/currentassets.asp) and liabilities, without taking other [tangible assets](https://www.investopedia.com/terms/t/tangibleasset.asp) or long-term liabilities into account. Advances in financial data collection now allow analysts to quickly access a firm’s entire set of financial statements, ratios, and other benchmarks.

Investing in a net-net was considered safe short-term because its current assets exceeded its [market price](https://www.investopedia.com/terms/m/market-price.asp). In a sense, the long-term growth potential and any value from long-term assets are free to an investor in a net-net. Net-net stocks will usually be reassessed by the market and priced closer to their true value in the short term. Long term, however, net-net stocks can be problematic.

The formula for net current asset value per share (NCAVPS) is:

> NCAVPS = Current Assets - (Total Liabilities + Preferred Stock) ÷ # Shares Outstanding

Graham advised investing in companies whose stock prices are 67% or less of their NCAV per share for significant benefits. And, in fact, a study done by the State University of New York showed that from the period of 1970 to 1983, an investor could have earned an [average return](https://www.investopedia.com/terms/a/averagereturn.asp) of 29.4% by purchasing stocks that fulfilled Graham's requirement and holding them for one year.

Graham noted that not all stocks chosen by the NCAVPS formula yield strong returns, so investors should diversify. Graham recommended holding at least 30 stocks.

## Important Factors in Net-Net Investing

Current assets, which are used in the net-net approach, are defined as assets that are [cash](https://www.investopedia.com/articles/pf/08/pay-in-cash.asp), and assets that are converted into cash within 12 months, including [accounts receivable](https://www.investopedia.com/terms/a/accountsreceivable.asp) and inventory. As a business sells inventory and customers submit payments, the firm reduces inventory levels and receivables. This ability to collect cash is the true value of a business, according to the net-net approach.

Current assets are reduced by [current liabilities](https://www.investopedia.com/terms/c/currentliabilities.asp), such as accounts payable, to calculate net current assets. [Long-term assets](https://www.investopedia.com/terms/l/longtermassets.asp) and liabilities are excluded from this analysis, which only focuses on cash that the firm can generate within the next 12 months.

## Limitations and Criticisms of Net-Net Investing

Net-net stocks might be poor long-term investments because management often doesn't fully liquidate at the first trouble sign. In the short term, a net-net stock may make up the gap between current assets and market cap. However, over the long term, an incompetent management team or a flawed business model can ruin a [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp) quite rapidly. 

Net-net stocks may end up in this state due to market-identified long-term issues. For example, Amazon's rise put many retailers into net-net positions, allowing some investors to profit short-term. In the long term, however, many of those same stocks have gone under or been [acquired](https://www.investopedia.com/terms/a/acquisition.asp) at a discount. 

The net-net strategy of finding companies with a market value below its net-net [working capital](https://www.investopedia.com/ask/answers/100715/why-working-capital-management-important-company.asp) (NNWC)—cash and short-term investments + 75% of accounts receivable + 50% of inventory - total liabilities—may be an effective strategy for small investors. Net-net companies are sought after by day traders which may contribute to their rise in month-to-month valuation. 

## The Bottom Line

Net-net investing, pioneered by Benjamin Graham, focuses on evaluating a company based on its net current assets per share (NCAVPS). This strategy emphasizes short-term safety by identifying stocks trading for less than 67% of their NCAV, which Graham's studies have shown could yield substantial returns. However, its exclusion of long-term assets and liabilities can pose risks to long-term investors. While suitable for short-term gains, investors should diversify holdings and recognize that net-net stocks might be discounted due to inherent business flaws. Hence, thorough research and diversification are essential for employing this strategy effectively.  

> **Article Sources**
>
> 1.  CFI. “[Net Current Asset Value Per Share (NCAVPS)](https://corporatefinanceinstitute.com/resources/wealth-management/net-current-asset-value-per-share-ncavps/).”
>     
> 2.  Oppenheimer, Henry R. “[Ben Graham’s Net Current Asset Values: A Performance Update](http://csinvesting.org/wp-content/uploads/2015/03/Ben-Graham-Net-Current-Asset-Values-A-Performance-Update.pdf).” _Financial Analysts Journal_, vol. 42, no. 6, November-December 1986, pp. 40-47.
>     
> 3.  American Association of Individual Investors. “[Benjamin Graham's Net Current Asset Value Approach](https://www.aaii.com/journal/article/benjamin-graham-s-net-current-asset-value-approach?via=emailsignup-readmore).” Email required.