Liquidity Traps in Net-Nets: How to Avoid NCAV Mirage

The core problem

Net-nets screen cheap on NCAV, but low-quality working capital can erase that margin. Treat receivables and inventory as probabilistic, not certain.

Haircut playbook

• Receivables: pull aging from filings; haircut 10-30 percent if 60-90 days, 50 percent if 90 days plus, 100 percent if customer concentration is extreme.
• Inventory: 50-100 percent haircut on specialized finished goods; smaller (20-40 percent) on raw materials; zero on work-in-process without clear orders.
• Cash: verify restrictions, pledged accounts, FX controls; subtract restricted cash from NCAV.
• Other current assets: assume zero unless you understand each line item (VAT receivables, advances, deposits).

Red flags that turn NCAV into a mirage

• Rising receivables while revenue is flat or down.
• Inventory growth faster than sales or gross margin compression.
• Customer concentration over 25 percent of sales without credit insurance.
• Auditor emphasis paragraphs on going concern or working-capital adequacy.
• Repeated qualification: "slow moving and obsolete inventory" without matching write-downs.

Adjusted NCAV workflow

1) Start with reported NCAV.
2) Apply line-item haircuts above.
3) Recompute price to adjusted NCAV (P/Adj-NCAV).
4) Demand price <= two-thirds of adjusted NCAV.
5) Size based on liquidity (average daily dollar volume) and bid-ask width.

Practical examples

• Tight spreads and cash-heavy: smaller haircuts, larger position.
• Hardware distributor with aging inventory: heavy haircut; skip if P/Adj-NCAV > 0.8.
• Single-customer manufacturer: haircut receivables sharply or avoid.

Internal links and tools

• Balance-sheet events: Shares outstanding changes
• Volume tell: Interesting volume events
• Price pressure: Near-lows scanner
• Sentiment: Short interest changes
• More reading: Resources hub

Compliance note

This guide is educational and not investment advice. Do your own research or consult a professional adviser.