Liquidation Value

Liquidation value investing is a method made famous by Benjamin Graham. Graham would look for firms whose market value was trading well below the liquidation value because this would give him a "margin of safety." To calculate the liquidation value Graham would look at the firm's cash, inventory, accounts receivable, marketable securities, and total liabilities. Note that Graham ignored long term fixed assets because the liquidation value of these assets is very ambiguous.

For this site I use the following procedure:

• Add cash
• Add short term investments
• Add long term investments
• Add 0.5 * inventory
• Add 0.75 * accounts receivable
• Subtract total liabilities

This yields a conservative estimate of the firms liquidation value which we can compare to the market value of equity. On the liquidation list that I publish, the liquidation ratio is the market value of equity divided by the liquidation value. Everything else held constant, lower is cheaper.