What a net-net actually is, and why most of them stay cheap
Net current asset value, Graham's two-thirds rule, and the three balance-sheet tests that decide whether the discount survives long enough to close.
6 min read · updated
The arithmetic
Net current asset value is current assets minus total liabilities — every liability, not just the current ones. It is deliberately brutal: it assumes the factories, the brand and the goodwill are worth nothing, and asks what is left if the company settled everything it owes out of its working capital.
A net-net is a company whose market cap is below that number. Graham's rule of thumb was to pay at most two thirds of NCAV, which is the same as requiring NCAV of roughly 1.5x the market cap. That ratio is the screen's default and it is tunable.
Why the discount is usually real and usually persistent
A company trading below its liquidation arithmetic is normally losing money. The market is not being stupid; it is pricing in the cash that will be burned before anything changes. That is why the NCAV screen tests the current ratio as well as the discount: a company that must raise money next year to pay its bills will raise it from you, by issuing shares.
It is also why the screen tests debt/equity. Lenders rank ahead of shareholders. Leverage can consume the entire discount before it closes, and a levered net-net is frequently a net-net on its way to being nothing.
The third test is dilution — the year-over-year change in share count. A discount that closes while the share count grows is a discount somebody else collected. Note that this figure comes from annual filings, so it lags: a company that issued stock last quarter can still pass.
What the arithmetic cannot see
NCAV treats inventory and receivables at book. For a retailer holding last season's stock, or a lender whose 'current assets' are a loan book, book value and realisable value are different numbers. Financials and REITs are screened but flagged as incomparable rather than excluded, because a bank's balance sheet does not mean what the formula assumes it means.
Net-nets work statistically, across a basket, over a period measured in years. They do not work reliably name by name, and nothing in the arithmetic tells you which of the two you are looking at.