A Ratio used by Ben Graham the famous Value Investor. It is defined as the ratio of Net Current Assets minus non current liabilities to the Market Capitalisation. Graham was looking for companies with a ratio of less than two thirds. Very few shares meet his criteria these days.
Market Capitalisation /(Net Current Assets – Creditors Long – Provisions)
I ran some numbers through their database. I pulled up all the companies in Sharelock's database with market caps >=£50M. There turned out to be 773 of them. This seemed to be suspiciously low. If you pull up all of the companies in their database, you get over 1000 of them. Quite a few of them are microscopically small: 0.5M in market cap, for example. I'm going to assume that the list of 773 is complete for the purpose of this exercise.
Of the 773 companies, 688 had non-null GRs (Graham Ratios). The null entries were banks and non-life insurance companies, plus a couple of strays. There quite a lot of banks and insurance companies on the stock market. I excluded non-nulls from further selection. The logic behind this is that if you want to apply a value-based approach to banks and insurers, then you should apply separate criteria.
439 of the 773 companies (just over half!) had negative GRs. I excluded them from further consideration - as the sheer quantity of them mean that they would dominate the percentile rankings.
So that leaves 249 companies out of 773 which have positive GRs. I ranked these companies in ascending GRs. Below I present a table of the percentile and GR:
% GR P05 1.0 P10 1.5 P20 2.9 P40 6.3 P60 11.2 P80 24.5
So P05 means the 5th percentile, P10 means the 10th percentile, and so on. I have concentrated on quintiles - but of course we are mostly interested in what's at the bottom of the barrel, or top, depending on how you look at it.
Here is a table of the top 20%:
|RCG||RCG HOLDINGS||88.03||30.25||ELECTRONIC AND ELECTRICAL EQUIPMENT||0.43|
|BDEV||BARRATT DEVELOPMENTS||765.55||79.3||HOUSEHOLD GOODS AND HOME CONSTRUCTION||0.49|
|GLE||GLEESON (M J)||53.95||102.5||CONSTRUCTION AND MATERIALS||0.66|
|TW.||TAYLOR WIMPEY||830.1||25.97||HOUSEHOLD GOODS AND HOME CONSTRUCTION||0.67|
|BVS||BOVIS HOMES||452.37||339.7||HOUSEHOLD GOODS AND HOME CONSTRUCTION||0.7|
|BWY||BELLWAY||650.71||538.5||HOUSEHOLD GOODS AND HOME CONSTRUCTION||0.82|
|ABBY||ABBEY||91.16||370||HOUSEHOLD GOODS AND HOME CONSTRUCTION||0.82|
|PSN||PERSIMMON||1084.57||360.2||HOUSEHOLD GOODS AND HOME CONSTRUCTION||0.87|
|MTVW||MOUNTVIEW ESTATES||154.06||3950||REAL ESTATE INVESTMENT AND SERVICES||0.92|
|RDW||REDROW||318.76||103.3||HOUSEHOLD GOODS AND HOME CONSTRUCTION||0.96|
|PMHL||PROSPERITY MINERALS HOLDINGS||159.72||113||CONSTRUCTION AND MATERIALS||0.96|
|SGR||SHORE CAPITAL||69.65||28.5||FINANCIAL SERVICES||1.01|
|GFRD||GALLIFORD TRY||233.4||285.25||CONSTRUCTION AND MATERIALS||1.03|
|POL||POLO RESOURCES||124.62||5.13||FINANCIAL SERVICES||1.11|
|FCCN||FRENCH CONNECTION||51.04||53.25||GENERAL RETAILERS||1.19|
|TRE||TRADING EMISSIONS||220.04||85.5||FINANCIAL SERVICES||1.19|
|NUM||NUMIS CORPORATION||127.54||114||FINANCIAL SERVICES||1.23|
|RAB||RAB CAPITAL||63.54||13.5||FINANCIAL SERVICES||1.3|
|CHNS||CHINA SHOTO||59.76||256||ELECTRONIC AND ELECTRICAL EQUIPMENT||1.32|
|BKG||BERKELEY GROUP HOLDINGS||1095.6||834.5||HOUSEHOLD GOODS AND HOME CONSTRUCTION||1.38|
|PLAZ||PLAZA CENTERS NV||310.36||106||REAL ESTATE INVESTMENT AND SERVICES||1.47|
|PRX||PROXIMAGEN NEUROSCIENCE||83.33||145.25||PHARMACEUTICALS AND BIOTECHNOLOGY||1.55|
|CWR||CERES POWER||63.76||74||ELECTRONIC AND ELECTRICAL EQUIPMENT||1.76|
|CSR||CSR||584.25||324.1||TECHNOLOGY HARDWARE AND EQUIPMENT||1.77|
|BLZ||EMBLAZE||50.54||45.25||SOFTWARE AND COMPUTER SERVICES||1.79|
|CPS||CPL RESOURCES||75.35||202.5||SUPPORT SERVICES||1.81|
|RNVO||RENOVO GROUP||69.55||36.5||PHARMACEUTICALS AND BIOTECHNOLOGY||1.85|
|TMW||TIMEWEAVE||55.22||24.5||SOFTWARE AND COMPUTER SERVICES||1.95|
|EVG||EVOLUTION GROUP||188.15||81||FINANCIAL SERVICES||2.07|
|SIG||SIGNET JEWELERS||1915.64||2236||GENERAL RETAILERS||2.08|
|PVCS||PV CRYSTALOX SOLAR||220.81||53||ALTERNATIVE ENERGY||2.1|
|CLST||COLLINS STEWART||197.07||79.5||FINANCIAL SERVICES||2.18|
|NEO||NEOVIA FINANCIAL||71.36||59.5||FINANCIAL SERVICES||2.27|
|TFW||THORPE (F W)||80.87||690||ELECTRONIC AND ELECTRICAL EQUIPMENT||2.28|
|BOR||BORDERS AND SOUTHERN PETROLEUM||300.99||70.25||OIL AND GAS PRODUCERS||2.3|
|ORA||ORA CAPITAL PARTNERS||70.25||106.25||FINANCIAL SERVICES||2.32|
|ERE||EREDENE CAPITAL||50.44||18||REAL ESTATE INVESTMENT AND SERVICES||2.33|
|NORK||NORKOM GROUP||84.87||94.5||SOFTWARE AND COMPUTER SERVICES||2.48|
|BVC||BATM ADVANCED COMMUNICATIONS||90.24||22.5||TECHNOLOGY HARDWARE AND EQUIPMENT||2.55|
|PON||PSION||132.14||94||TECHNOLOGY HARDWARE AND EQUIPMENT||2.61|
|HTG||HUNTING||846.26||640||OIL EQUIPMENT - SERVICES AND DISTRIBUTION||2.66|
|CNKS||CENKOS SECURITIES||68.93||101||FINANCIAL SERVICES||2.72|
|ITL||INTEC TELECOM SYSTEMS||226||71.75||SOFTWARE AND COMPUTER SERVICES||2.86|
|KEA||KEA PETROLEUM||53.41||10.5||OIL AND GAS PRODUCERS||2.92|
|SEY||STERLING ENERGY||149.7||68.25||OIL AND GAS PRODUCERS||2.98|
There are only 4 companies that satisfy Ben Graham's value criterion. Of those 4 companies, 3 are housebuilders. The whole of the top of the list is choc full of housebuilders. This is not terribly surprising considering that housebuilding has taken a tumble due to economic times, and the fact that WIP on house construction is shown as part of the current assets. Housebuilders carry a lot of WIP/stock of houses!
So, using this criterion is likely to be rather unsatisfying, and I definitely that an investor should buy a whole bunch of housebuilders. In order to produce adequate diversification, an investor will have to start selecting companies lower on the list. A cut-off of 1.5 seems to low to ensure adequate diversification. A cut-off point at around 3 would seem sensible.
My own take on this is that the basic idea is good, but I think it is very difficult to practice under current circumstances - and dangerous to practice under his strict criterion. The market is not especially high at the moment, so one would think that there would be a fair selection to choose from. However, this does not appear to be the case. The Investors Chronicle has an annual selection using the Graham Ratio idea. Alas, I can't find a reference just now. They don't apply the strict criterion - it's too limiting - but they go up to about 1.5. I suspect that they are using a better database than me. My recollection is that the performance of their model portfolios has been resoundingly excellent. I seem to recall that Stingy Investor has been running a similar portfolio for many years, and has produced returns clearly superior to the market.