While this is a great start, let me also tell you a few more things which you should be aware of.
- Graham operated in the US where shutting down a company and liquidating the assets takes about a week or so. In India it doesn’t happen at all. The laws are not favorable and workers will not let any plant shut down, period. So while the current assets are more than the entire firm, the value unlocking doesn’t happen at all. So following Graham’s formula requires some more work in India.
- Contingent liabilities can suck up all the current assets and then some
- A malicious promoter can clean up all the current assets and then some (example: where did the cash in Treehouse go?)
- If the co is a micro cap (say below 50Cr in value) you run a risk of the co being undervalued for a long long long time. Why/how this happens I can’t explain but it does happen in Indian markets. (This mystery is on par with dramatic undervaluation of DVR shares in India)
Having said that, don’t let this discourage you. I’ve made a decent chunk buying cos which were significantly undervalued in relation to their current assets (e.g. Indian Toners, Divyashakti Granites, Trigyn, Madhav Marbles, Prima Plastics, Virinchi and so on). So yes, it’s possible, but the big caveat is that you should not skip reading the last few annual reports cover to cover and if there is any doubt then just pass.
Disc: Long some of the stocks mentioned above at a significantly lower valuation