Hi guys,
I am new to this community....so it's my first post here ....

There's an article I read from the Star about the NCAV at below is the article;

DESPITE several measures by the US Government to rescue its financial sector and the overall US economy, global stock markets continued to crash further as these measures confirmed that the problems faced by US financial institutions were indeed serious and most investors were not convinced they had seen the worst.

Since most global financial institutions are well connected, the focus is on Europe - whether there are any big giant financial institutions that will face problems similar to those that fell Lehman Brothers or AIG. Lately, some analysts have started to postulate that the current crisis may mirror the Great Depression in 1929. Some experts claimed the recent financial problems started as far back as the financial liberalisation since 1929.
Even though nobody can be sure if we are currently in depression, we still need to prepare for the worst. Investment guru Benjamin Graham, the father of value investing, went through the depression in 1929 and lost almost all of his money during the crash.

In general, Graham’s investing principles are suitable for investors looking for low risk stocks that are selling at a great discount, which is quite appropriate for our current market situation. One of Graham’s famous investing methods is the net current asset value (NCAV).
The basic principle behind NCAV is to look at stocks selling lower than the value of the net current assets after deducting the current liabilities and long-term liabilities. Graham’s contention is that by buying stocks selling below their NCAV, investors are buying cash at a discount and are effectively paying zero for a company’s fixed assets, such as plant, building and patents.
In general, Graham postulates that if you pay as little as two-thirds of “cash” for a firm, you have really got nothing to lose. This method is suitable for valuing financial institutions like banking firms, insurance companies, stockbroking firms as well as companies sitting on plenty of cash with no core businesses.

Assuming Bank A has total current assets, total current liabilities and long-term liabilities of RM10bil, RM8bil and RM500mil respectively,
NCAV = Total Current Assets — Total Current Liabilities — Long-term liabilities = RM10bil — RM8bil — RM500mil = RM1.5bil
If Bank A has a total outstanding shares of 500 million, its NCAV per share will be equivalent to RM1.5bil/RM500mil or RM3 per share.

Based on the Graham’s rule of thumb of two-thirds of its NCAV, we will only call it a buy if it is selling at 67% of RM3 or RM2.
In an uptrending market, it will be very hard to find a good stock selling at 67% to its NCAV, especially for a banking stock.
The 33% discount to the NCAV provides the margin of safety. This is one of the most important concepts used by Graham - only buy companies that are cheap relative to their intrinsic value.
He postulates that even with the best research, investors can never know all about a company.
If we buy businesses that are so cheap that they are selling for less than the NCAV, the potential losses that we may experience may be quite minimal.
Despite the above stringent selection criteria, Graham requires investors to investigate the quality of the balance sheet and check further whether the companies pass the following tests: sound business with other desirable factors such as good earnings and revenue growth; honest and competent managers; and stability of its future performance.
In a normal market, public listed companies rarely trade below their NCAV. Occasionally, we may be able to find some candidates fitting the above criteria. The following are possible reasons for a company to sell below its NCAV.
First, a company may have disposed of its core assets and is now sitting on a lot of cash. As a result of the uncertainty of its future businesses, investors may value the company lower than its NCAV.
Second, investors may be questioning certain portions of its current assets, for example, the recoverability of certain receivables. For a banking stock, if it has very high non-performing loans against its total loans, it may also trade below its NCAV.
We believe out of the thousands of stocks on Bursa Malaysia, only a handful qualify as good value investments under these criteria. However, investors have great chance of identifying good stocks based on this method during the current market crash.

• Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.


Q: But where to get the data like Total Current Assets, Total Current Liabilities and Long-term liabilities. Mostly, we could get the is out dated financial report.

Cheers

I am wondering the same thing.

It's impossible to perform a real time information to every investors. Not now at least, and I doubt this would happened in any future.

Even though they're historical, but they're the best indicator available.

Too generalised, it is good giving out an idea to acquire undervalued stock, but practically wise, it is very hard to implement across in general.

You need specific company, industry issue, situation to assess, not as simple or straight forward as that. The article mainly giving out an idea how to assess a particular situation, it doesn't right in all extent.

The formula
NCAV = Total Current Assets — Total Current Liabilities — Long-term liabilities

So if a dividend stock that constantly giving out most of its profit to the shareholders then it will result in low current asset as well (with minimal liability), then those consistently giving out 8-9% dividend yield, then in this kind of formula, it won't work well.

If you applied on current financial stocks, this formula even worst to give an idea to buy or sell. Let say virtual eg. a financial giant Lxx, or Axx, that current asset is 500 billions, - 100 current liabilities - 100 long term liabilities, ended up NCAV 300 billions, if outstranding share is 1 billion, it worth 300, so applied 2/3 rule, can buy at 200 level.

But due to massive writedown, loss, then resulted in 300 billions losses, then value eventually being wiped out altogether, so undervalued become overvalued.

Thanks for the insight ...

The formula gives a extremely conservative value to any company. Graham is known to be very conservative and wouldn't part with his money unless its a sure win.

By buying companies which has Net Current Assets much more than their Current and long term liabilities combine, the margin of safety is sound in the case of any credit default which will not bankrupt that company.

For banks case, which suffered the meltdown. Their current liabilities is actually way beyond what their current assets are (Cash assets not receivables). Because if their current liabilities + long term liabilities is smaller, even if they completely write-off their bad debts an the creditors comes calling, they still will have a positive net current assets.

Graham not only use that positive net current assets, but on top of that, he advises to buy at 2/3 of that value so it is even cheaper, which increases your margin of safety even more.

The problem with the formula is, it is too simple and will be mis-interpreted to suit some analysts to conform with the formula. Cheeroy is right to say you can't apply it to everything unless you can quantify everything accurately.

And as far as I know, all company dividend policies do not extent a 100% giveback unless it is a Cooperative Organization. Most is 50% and the rest of the profits remains as cash assets which will be growing if not used or re-invested into the business.

Another thing, I believe during Graham's time most people are not fully educated in the stock market system or the general movement of it. So his method is almost impossible to apply nowadays unless the crash is so massive that conventional thinking is completely disregarded and there is absolutely no support at all at the very bottom.

This post has been edited by skiddtrader: Oct 9 2008, 10:06 PM

Yup, too simple and especially some newbie in the market can easily misled by this formula that's why I want to raise this issue.

Banks prior before the meltdown, indeed they have billions of net current asset. So with these model, if one uses this formula, it might prompt one to buy, it become a trap already, similar like PER issue.

This formula doesn't work well in financial sector, because once economy into recession or some financial turmoil, banks are the front line to be hit because of the nature of financial sector. Banks taking into deposit to lend out, so its asset and liability surely enormous, once a several % of debt default can result bank become insolvency. That's what happening now.

This formula probably work well in very conservative sector, like consumer staple industry because there is not much derivatives in the business model and complexity of business is much simpler.