A company’s net current assets are an indication of its short-term financial health. A positive value means that the company has more current assets than its current liabilities, while a negative value indicates that the company may have trouble financing its day-to-day operations.
A popular metric among investors, Net worth asset value NCAV was first described by Benjamin Graham in his 1934 book Security Analysis. It’s a simple, straightforward way to evaluate a company’s true worth by subtracting its total liabilities from its current assets. The higher the number, the more likely it is that the company has enough liquid assets to pay off its debts in a timely manner.
The term net current assets is often abbreviated as NCA, and it’s sometimes also referred to as working capital. It’s an important metric for small business owners in the UK because it provides insight into a company’s liquidity and its ability to pay off its short-term debts.
There are many different ways to calculate NCA, but the most common method is to add up all of a company’s current assets and then subtract all of its current liabilities. This figure is typically listed in a company’s balance sheet under the heading of current assets or working capital.
Current assets are items that can be turned into cash in a relatively short amount of time, such as currency and deposit accounts, account receivables, and short-term securities like stocks. They also include inventory and pre-paid expenses, such as insurance.
Conversely, current liabilities are items that must be paid in the near future, such as debt repayments and taxes owed. They’re included in a company’s balance sheet under its liabilities or working capital section.
To calculate net current assets, simply add up all of a company’s currently available cash and short-term investments and then subtract its current liabilities. This figure is often listed in a company’s balance sheet or working capital section.
While it’s true that a high net current asset ratio isn’t a guarantee of success, it’s worth noting that several studies have shown that companies trading at 2/3 of their NCA have historically outperformed the S&P by double or more. It’s a simple strategy that can yield tremendous returns for patient investors with strong temperaments.
If you’re interested in learning more about net current assets and how to apply them to your investment portfolio, we encourage you to download our free whitepaper, Investing in Net Current Asset Value. It’s full of useful information and tips that will help you get the most out of your stock selection process. Just be prepared to spend some time sifting through the rocks in order to find those net current nuggets of gold! You’ll thank yourself for it in the long run. Good luck!