NNWC valuation popularised by Benjamin Graham aims to give a margin of safety versus the likely liquidation proceeds.
The NNWC formula considers that not all balance sheet amounts may reflect current reality, hence discounts are applied. However, cash and short term investments are taken at their full value.
Inventory is taken at 50 cents on the dollar (because of potential discounting when it is sold at close-out prices).
Receivables are discounted at 75 cents on the dollar (because some of them might not be collectable).
This calculation assumes that all creditors are paid off.
NNWC is a highly conservative measure of value which Graham chose as being likely to represent a significant discount to the value that shareholder would receive in an actual event of liquidation. NCAV is Cash and Short Term Marketable Investments, plus Accounts Receivable * 75% + Inventory * 50% – Total Liabilities.
Liquidation Valuations - such as NNWC, NCAV and Tangible Book Value - estimate the amount of money that a company could quickly be sold for, if it were to go out of business. They are typically lower than fair market value. Companies which are seriously underperforming or in collapsing industries sometimes have a liquidation value exceeding market capitalization - in such a scenario, there may be an arbitrage opportunity to sell off the company's assets. However, it depends if the business is stable enough so that operating losses don't eat away the existing assets.