Liquidation Value and Net-Net Investing: Ben Graham's Asset-Based Floor Valuation
Liquidation value estimates what shareholders would receive if a company sold all assets and paid all debts. Learn about net-net stocks and Ben Graham's asset-based approach.
What is liquidation value?
Liquidation value is the estimated amount shareholders would receive if a company ceased operations, sold all of its assets, and paid off all liabilities. It represents a floor valuation: the minimum a business should be worth if it simply stopped operating. Ben Graham popularized this concept through his net-net strategy, which looked for stocks trading below their net current asset value (NCAV), defined as current assets minus total liabilities.
How to calculate NCAV and liquidation value
- Net current asset value (NCAV) = current assets minus total liabilities (including preferred stock)
- Apply haircuts to asset categories: cash at 100%, receivables at 75-90%, inventory at 50-75%, and fixed assets at lower percentages
- Compare the resulting value per share to the current stock price
- A stock trading below two-thirds of NCAV was Graham's threshold for a net-net bargain
True net-net stocks are uncommon in modern markets, especially among large caps. They tend to appear during severe downturns or in neglected micro-cap and international stocks. When found, historical studies show they have produced strong long-term returns as a group.
Screen for deep value
Use the screener to find stocks trading near or below book value, a starting point for identifying potential liquidation value candidates.
FAQs
Why would a stock trade below liquidation value?▼
It usually means the market expects the company to burn through its assets through operating losses, or that the assets are less liquid than they appear on the balance sheet. Sometimes it reflects pure neglect or pessimism, which creates an opportunity.
Is liquidation value relevant for technology companies?▼
Rarely. Tech companies derive most of their value from intangible assets like intellectual property and human capital, which have little liquidation value. This method works best for asset-heavy businesses in sectors like manufacturing, real estate, or natural resources.
What are the risks of net-net investing?▼
The main risks are value traps (companies that continue to destroy value), illiquidity in micro-cap stocks, and the possibility that management will waste the assets rather than return them to shareholders. Diversifying across many net-nets reduces individual stock risk.
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Intrinsic Investor is for education and research only. Not financial advice.