It's a good point to remind us that if a stock is trading above cash or above net-net, then subtracting the cash or net current assets from the market cap is merely an intermediate step toward pricing the residual. I sometimes see analysts mentioning that a certain stock is trading a low PSR or P/E after subtracting cash. Subtracting net current assets is something similar, but better.
If a stock is trading at a multiple M (of sales, earnings, cashflow, or whatever) and if it is trading at a multiple N of net-net (or cash if you prefer), then the underlying company is trading at an adjusted multiple (1 - 1/N)* M. This adjusted multiple can be used to compare stocks.
In fact, it is possible to screen on this parameter, for low p/e, low PSR, or whatever. I just gave it a try, using MarketGuide's NetScreen, and it works.
In my first attempt, I adjusted the criteria till it yielded a list of only 16 stocks, and in that list I found FLXS (a furniture maker). FLXS trades for 1.28 X net current assets. Thus, its p/e of 7.2 adjusts downward to 7.2 * (1-1/1.28) = 7.2 * 0.22 = 1.6, which is one of the lowest values I can find for a company that looks better than what Paul Senior calls a "cigar butt". (The stock is thinly traded, though.)
The adjusted multiple could go negative. That's what happens when a stock trades for less than net current assets. You can still compare the numbers. The less positive, or more negative, the cheaper the valuation. Of course the cheapest companies often look like cigar butts. |
