Assessing a company’s liquidation value is essential to the net-net investing strategy. We bucket the calculation of liquidation value into three general approaches, which are described in the book Benjamin Graham’s Net-Net Stock Strategy by Evan Bleker:
1) Net Current Asset Value (NCAV)
NCAV = Current Assets – Total Liabilities
The simplest and the most conservative of the approaches. It just takes the current assets and subtracts total liabilities of the company. We look for companies where this calculation would produce a positive number. In other words, net currents assets are larger than total liabilities of the company. Fixed assets are completely ignored as there is often serious doubt about their valuation and for what they can be sold in a liquidation scenario.
2) Net-Net Working Capital (NNWC)
NNWC = Cash & equivalents + Receivables*0.8 + Inventory*0.67 + Fixed Assets*0.15 – Total Liabilities
This approach is similar to the one above, but instead of taking current assets at their face value, they are discounted to approximate their value in a liquidation scenario. The value of cash & equivalents is usually close to their real value, while for example inventories wouldn’t be sold at their full balance sheet value in a liquidation scenario. Additionally, this approach to calculating liquidation value includes fixed assets, which are valued at 15% of their balance sheet value. In reality, the value of those fixed assets would depend on the specific industry in which the company operates and the accounting decisions of that company. For companies that own a lot of real estate, fixed assets might be understated on their balance sheet because they are usually carried at cost. For the most accurate estimate, fixed assets should be calculated on a case-by-case basis.
3) Early Graham NNWC Approach
NNWC = Cash & equivalents + Receivables*0.8 + Inventory*0.5 + Long-Term Assets*0.2 – Total Liabilities
This approach is described as the “Early Graham” approach in Benjamin Graham’s Net-Net Stock Strategy book. It’s very similar to the NNWC approach described above. The difference comes from the fact that the early Graham approach includes ALL long-term assets, which includes goodwill and other intangible assets. Long-term assets are valued at 20% of their balance sheet value. This is the least conservative approach out of the three but can be useful in estimate liquidation value for companies who have a lot of their value in long-term assets other than fixed assets.
