Monday, October 24, 2011

Benjamin Graham's Net Working Capital Test

Benjamin Graham created many techniques for discovering undervalued stocks which were written in his famous book "The Intelligent Investor".  One of them is an easy but very powerful technique called "Working Capital Test".

This formula is easy to apply and very powerful in revealing really bargain stocks. Below are the steps to calculate the "Net Working Capital" and it's relation with market value of the stock.

Step 1: Find the days list of stocks that have hit new lows for the past year.

Step 2: From the Company annual report or recent quarterly report see the value of the net working capital.
Net Working Capital = Current Assets - Total Liabilities*

Step 3: If the Market capitalization of the stock is being traded at a price below its net working capital, buy the stock.

* Total Liabilities including any preffered stock and long term debt

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