Assessing an organization’s liquidation worth is crucial to the net-net investing technique. We bucket the calculation of liquidation worth into three common approaches, that are described within the e-book Benjamin Graham’s Internet-Internet Inventory Technique by Evan Bleker:
1) Internet Present Asset Worth (NCAV)
NCAV = Present Belongings – Whole Liabilities
The only and essentially the most conservative of the approaches. It simply takes the present property and subtracts complete liabilities of the corporate. We search for firms the place this calculation would produce a optimistic quantity. In different phrases, internet currents property are bigger than complete liabilities of the corporate. Mounted property are utterly ignored as there’s typically critical doubt about their valuation and for what they are often bought in a liquidation situation.
2) Internet-Internet Working Capital (NNWC)
NNWC = Money & equivalents + Receivables*0.8 + Stock*0.67 + Mounted Belongings*0.15 – Whole Liabilities
This method is just like the one above, however as a substitute of taking present property at their face worth, they’re discounted to approximate their worth in a liquidation situation. The worth of money & equivalents is normally near their actual worth, whereas for instance inventories wouldn’t be bought at their full steadiness sheet worth in a liquidation situation. Moreover, this method to calculating liquidation worth contains fastened property, that are valued at 15% of their steadiness sheet worth. In actuality, the worth of these fastened property would rely upon the precise trade through which the corporate operates and the accounting choices of that firm. For firms that personal plenty of actual property, fastened property is perhaps understated on their steadiness sheet as a result of they’re normally carried at value. For essentially the most correct estimate, fastened property ought to be calculated on a case-by-case foundation.
3) Early Graham NNWC Method
NNWC = Money & equivalents + Receivables*0.8 + Stock*0.5 + Lengthy-Time period Belongings*0.2 – Whole Liabilities
This method is described because the “Early Graham” method in Benjamin Graham’s Internet-Internet Inventory Technique e-book. It’s similar to the NNWC method described above. The distinction comes from the truth that the early Graham method contains ALL long-term property, which incorporates goodwill and different intangible property. Lengthy-term property are valued at 20% of their steadiness sheet worth. That is the least conservative method out of the three however may be helpful in estimate liquidation worth for firms who’ve plenty of their worth in long-term property apart from fastened property.
