Benjamin Graham NCAV or Net-Net Working Capital and Intrinsic Value Formula

Benjamin Graham

NCAV or Net-Net Working Capital

NNWC = (Cash & Investments * 100%) + (Accounts Receivable * 75%) + (Inventory * 50%) – Total Liabilities

Intrinsic Value Formula

                                    The formula as described by Graham is as follows:

Value = Current (Normal) Earnings x (8.5 + (2 x Expected Annual Growth Rate)

Where the Expected Annual Growth Rate "should be that expected over the next seven to ten years."

The value of 8.5 appears to be the P/E ratio of a stock that has zero

growth. It is not clear from the text how Graham arrived at this figure, but it is likely it represents the y-intercept of a normal distribution of a series of various P/E values plotted against corresponding growth figures.

Graham's formula takes no account of prevailing interest rates; at the time he last updated the chapter, around 1971, the yield on AAA Corporate Bonds was around 4.4%. We can adjust the formula by normalizing it for current bond yields by multiplying by a factor of 4.40/{AAA Corporate Bond Yield}. Bond yields

can be found on Yahoo!

Let’s take a real-life example, using IBM. According to Yahoo!, the expected growth rate for IBM over the next 5 years is 10% per annum (note data is only available for 5 years ahead rather than the 7-10 years Graham states, but this should not make a significant difference). EPS for IBM over the last 12 months is $4.95. Taking these values and plugging in the 20 year AA Corporate bond yield of 5.76% (AA Bond yields are higher than AAA so will give a more conservative estimate of IV) in our adjustment gives:

Intrinsic Value = 4.95 x (8.5 + (2 x 10) x (4.40/5.76) = $107.77

IBM is currently trading at around $91, so it is currently slightly undervalued.

Building The Core With Vanguard: Domestic Bonds http://t.co/xmmU3xlKLn $AGG $BSV $SCHZ $VTI $BND

— ETF Investing (@SAlphaETF) June 11, 2015