What Are Net Current Assets? (With NCAVPS Formula and Tips)
By Indeed Editorial Team
Published August 4, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
There are many factors to consider when looking at a company's financial health, whether you're on the outside deciding whether to invest or on the inside looking at potential for improvement. There are many metrics and ratios that can provide information about this, like the company's net current assets and assets per share. It's important to understand what these metrics mean in order to make more educated financial decisions. In this article, we discuss net current assets, the NCAVPS formula and how to use them to understand a company's financial health.
What are net current assets?
A company's net current assets are the remaining amount when you subtract current liabilities from the current assets. Sometimes the terms "working capital" or "shareholders' equity" are used to describe the net current assets. A company's balance sheet includes both current assets and liabilities, so the net current asset calculation doesn't take extensive research. Here's the formula for net current assets:
Net current assets = current assets − current liabilities
To better grasp this formula, it's important to fully understand current assets and liabilities:
Current assets are an organization's available cash or assets that it can convert into cash within a year. They can include:
Physical cash and checking account balances
Inventory the company has already paid for
Accounts receivable, money that customers owe the company for services or goods already delivered
Prepaid expenses for goods or services not used yet
Read more: Current Assets: Definition and Examples
Current liabilities are any liabilities due within a year. They can include:
Unpaid bills a company owes to vendors
Taxes the company owes the government
Wages the company owes its employers
Loans they have taken out from a bank or financial institution
Any items listed as "payable," like accounts payable, notes payable or income taxes payable, are likely to be current liabilities.
Read more: Your Guide To Current Liabilities
What is NCAVPS?
NCAVPS stands for net current asset value per share. It can be a meaningful way to evaluate the financial health of companies, especially when investing, since it compares the company's financial assets and liabilities to the individual stock value. Potential investors can compare the company's NCAVPS to the price at which stock is currently trading to decide whether it's a wise financial choice.
Here's the formula to calculate NCAVPS:
NCAVPS = net current assets / number of shares outstanding
The number of shares outstanding is simply the number of shares owned by people or groups other than the company itself. Dividing the net current assets by the number of outstanding shares presents a value per share, which is useful since you can compare it more easily to the earnings per sale. When the company sells additional shares, the NCAVPS and earnings per share go down, since there are more shares available. When a company buys up its own shares, the NCAVPS and earnings per share go up.
How to do the NCAVPS calculation
Here are the steps to find a company's NCAVPS with an example calculation:
1. Find current assets and liabilities
First, find the company's current assets and liabilities. You can usually find this on a company's balance sheet, which is part of the documentation that publicly traded companies release each year. This information may be available for privately held companies as well, especially larger companies.
Example: An investor is considering buying Traditional Trading Trends stock, so they calculate the NCAVPS for the company. The investor reads the budget sheet for Traditional Trading Trends and finds their total current assets to be $1,000,000 and their total current liabilities to be $800,000.
2. Calculate net current assets
Next, calculate net current assets for the company. You can do this with the net current asset formula, subtracting liabilities from assets. Net current assets are also called shareholders' equity, since it's the amount of value the company holds for its shareholders.
Example: To calculate the net current assets for Traditional Trading Trends, the investor uses the net current asset formula:
Net current assets = current assets − current liabilities = $1,000,000 − $800,000
Net current assets for Traditional Trading Trends = $200,000
3. Divide net current assets by number of shares outstanding
Finally, use the net current assets in the NCAVPS formula. This shows how much of the net current assets would go to each outstanding share if the company becomes liquidated. A company reports their outstanding shares on their balance sheet.
Example: The investor finds that Traditional Trading Trends reported 8,000 outstanding shares on their budget sheet, so they apply the NCAVPS formula:
NCAVPS = net current assets / number of shares outstanding = $200,000 / 8,000
Traditional Trading Trends NCAVPS = $25
Tips for applying NCAVPS and net current assets
Here are some tips for using asset calculations in your personal and business decisions:
Compare within the same industry
Operating costs, typical assets and typical liabilities may vary from company to company. For example, financial businesses may have more liabilities than service businesses. While a certain amount of liability may be a risky sign in some industries, it may be the norm for others, so it's important to compare a company's NCAVPS to others in the same industry before making a value judgment on the company and the shares.
Understand how NCAVPS relates to stock prices
Since investors use NCAVPS to make decisions about buying stock, it's important to understand how the NCAVPS differs from the price of the stock. The stock price can change depending on the market, investor behavior and expected performance in the future. The NCAVPS depends on three numbers that the company controls: its liabilities, assets and outstanding shares. So the share price may change for internal or external reasons, while the NCAVPS changes because of company decisions.
Some investors consider any stock trading at a price below its NCAVPS to be a bargain, since the investor would make money if the company were to go out of business, sell its assets to pay its liabilities and distribute the value of the NCAVPS to each shareholder. This is why some investing strategies involve calculating the NCAVPS, but different strategies use equation variations, like total liabilities instead of current liabilities.
Consider what makes up the assets and liabilities
Net current assets is a reasonably simple calculation, so it's important to put it into context to understand a company's financial situation fully. Looking into specific assets and liabilities can help, since this can tell you more about how much risk and what kind of debt the company has taken on. Assets can also make a difference in the company's value, since things like accounts receivable may be easier to collect than selling old inventory.
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