Graham's net-net and two other ways to find cheap stocks

Benjamin Graham spent his life answering one simple question: how do you know a stock is cheap?

He did not use intuition. He did not listen to rumours. He did not forecast the market. He used numbers, and he developed three specific methods that apply directly to any market, including Vietnam today.

Method 1: net-net, buying cash assets below market price

This is Graham's most famous method, and his most uncompromising.

The core idea: if you can buy a whole company for less than the cash and liquid assets it holds, after paying off all its liabilities, you are buying money below face value.

How to calculate net-net current assets (NNCA):

NNCA = current assets − total liabilities

Current assets include cash, bank deposits, receivables and inventory, things convertible to cash within a year. Total liabilities include everything: short-term debt, long-term debt, taxes payable, every financial obligation.

Then divide by shares outstanding to get NNCA per share.

Graham's rule: if the share price is below two-thirds of NNCA per share, and the company is profitable, no further analysis is needed. Buy.

A Vietnamese example

Suppose a small manufacturer on HNX has these figures (in billion dong):

If the stock trades at 4,200 dong, below the 5,000 threshold, and the company is profitable, Graham would buy immediately.

The reason: you are paying 4,200 to receive 7,500 of net liquid assets, with all the plant, machinery and brand thrown in free.

An important caveat: Graham said plainly that loss-making companies with attractive NNCA are still dangerous, because losses eat into the assets and erase the cushion. The company must be profitable.

In Vietnam's market today net-nets are rare but not absent, especially during sharp corrections or among mid- and small-caps on HNX and UPCoM that nobody follows.

Method 2: three criteria, earnings yield, dividend yield and debt

Graham's second method does not require positive NNCA. Instead he used three measures to judge whether a stock is cheap against a safe bond.

Criterion 1: earnings yield at least double the bond rate

Earnings yield = EPS ÷ share price (the inverse of P/E)

The question is: if I buy this stock today, what return am I getting per dong spent? And is it more attractive than a safe bond?

Graham's standard: earnings yield must be at least double the long-dated government bond yield.

In Vietnam: the 10-year government bond yields around 5%. So to meet Graham's test, a stock's earnings yield must be at least 10%, equivalent to a maximum P/E of 10.

A company with EPS of 3,000 at a price of 25,000 has a 12% earnings yield: pass. The same company at 45,000 has 6.7%: fail.

Criterion 2: dividend yield at least two-thirds of the bond rate

Dividend yield = dividend per share ÷ share price

Graham's standard: dividend yield must be at least two-thirds of the long-dated government bond yield.

With a 5% bond, the minimum is 5% × 2/3 = 3.3%.

Example: a company paying 1,500 dong a share at a price of 30,000 yields 5%: pass. But many Vietnamese companies pay no cash dividend at all. For those, criterion 2 automatically fails and the investor needs to think harder.

Criterion 3: debt must not exceed equity

Debt-to-equity below 1.0

Graham regarded high debt as the value investor's enemy. Interest eats profit, and in a crisis debt can kill the company before the value is recognised.

The simple rule: total liabilities < shareholders' equity.

On Vietnam's exchanges many property and construction companies run at two to five times. They screen themselves out of Graham's list immediately. Manufacturing, consumer and pharmaceutical companies tend to run lower and pass more easily.

Method 3: ten criteria, five on value, five on safety

Graham's third method is more flexible. Rather than demanding a company meet every test, he required: at least one of five value criteria AND at least one of five safety criteria.

Five value criteria: is the stock cheap?

1. Earnings yield at least double the long-dated government bond yield
2. P/E in the lowest 10% of the whole market
3. Dividend yield at least two-thirds of the bond yield
4. Price below two-thirds of tangible book value (book value less goodwill)
5. Price below two-thirds of net current assets (current assets less current liabilities)

Five safety criteria: is the company durable enough?

1. Debt-to-equity below 1.0
2. Current assets at least twice current liabilities (current ratio ≥ 2)
3. Total debt below twice net current assets
4. EPS growth of at least 7% a year over the past decade
5. No more than two EPS declines of over 5% in the past decade

Applying it: a quick screen on a Vietnamese stock

Say you are looking at a food company on HOSE:

Company X meets two value criteria and three safety criteria: it qualifies under Graham.

Applying this in Vietnam

All three methods translate directly. You only adjust one input: instead of the US AAA bond rate, use the Vietnamese 10-year government bond yield, currently around 5%.

Every number you need is freely available: financial statements on Vietstock, CafeF, or each company's investor relations page. With roughly 1,600 stocks across HOSE, HNX and UPCoM, screening by these three methods quickly cuts the list to a few dozen worth deeper work.

A few things to watch when applying this locally:

Financial statement quality. Some small UPCoM companies have statements that are not meaningfully independently audited. The numbers may not be reliable. Favour companies audited by the Big Four or other credible firms.

Banks and financial companies. As Graham noted, banks have a distinctive balance sheet structure where very high D/E is normal. Do not apply the D/E < 1 test to them.

Net-nets are rare but real. During the 2022–2023 correction, several small stocks on HNX and UPCoM fell into net-net territory. Moments like that are the rare opportunity a value investor should have a watch list prepared for in advance.

Three methods, summarised

Graham was not looking for the perfect company. He was looking for a good enough company selling cheaply enough, cheap enough that even if he was wrong about the business prospects, he would not lose money because the margin of safety was wide.

Which is why, nearly a hundred years after he developed them, these methods still work. On Wall Street, in Tokyo, and on HOSE.

Silent discipline. Compound value.