Non current items in NWC
Hey all,
Something that I have never thought of before is confusing my mind at the moment. As for NWC goes, I always thought short term needs of the underlying company should be considered for, and never thought of any non current items before.
So with some adjustments any operating in current assets and current liabilities is part of NWC. This is clear.
However, I've come to see studies where some non current items are also included in the NWC calculations. For instance some trade receivables that are not going to be collected in 1 year (they are longer term - 2 years for instance) or some other items related to employee benefits that are non current on the BS, but are operating in nature and included in NWC purposes.
Would including those non current items be correct in NWC? I mean from an acquisition perspective, seller cannot redeem these now anyway, and the buyer cannot just ask these to be addressed in acquisition right. They are long term, and part of operations, but not a short term funding/liquidity requirement.
For valuation purposes would you include such items per NWC calculations? Or anything non current and operating, should be reflected in cash flows anyway so it should not be addressed. Whats your opinion?
It's not NWC, but it still affects cash flow, so it's a separate line on the cash flow statement (changes in operating assets and liabilities)
Hey,
Thanks for your reply.
In cash flow statement yes, but what about for DCF purposes for valuation?
I've seen this done like 100 different ways... In the academic sense your questions in textbooks often simplify balance sheets to Current Assets + Goodwill/Intangibles + PP&E. In practice however there are Other Non-Current Assets on most balance sheets. While technically these aren't really part of the NWC change they do need to be captured in Funds from Operations in order to make sure your capturing YoY changes in the cash flow statement.
I wouldn't lump it into NWC (though I have seen it lumped in). I agree with the above poster about just doing a separate line item.
For DCF purposes I would not include it, just be prepared for someone to challenge that assumption. As I mentioned this is one of those things I have seen done a couple different ways and everyone defends their own way.
The methodology to not include it is that NWC is supposed to be reflective of the actual OPERATING cash flows associated with doing business.. Things like Inventory, A/R, A/P, and Accrued Expenses. If the business has long term contracts where there are non-current Unearned revenue for longer-term contracts you could make a case for those (Commercial real estate builders for instance may have current and non-current NWC items given the time it takes to complete a project)
Thanks for your reply Dabbzman,
Yes the problem I have with those non currents are:
Other Non current assets on the BS might include:
1) Other Operating non current items 2) Other Non Operating non current items
Now for DCF and Valuation, from EV to equity value, I will adjust those non operating items. (Not the accounting expert but discussions for these can be made)
Now for operating non current items;
1) Should I assume that these are already reflected in cash flows and DCF? (Since we are valuing EV from DCF this includes everything operational). (Like fixed assets etc)
2) or Should i assume some parts of these (could be long maturity trade receivables, or defered revenues as you mentioned) in the NWC?
If it is 1, then no adjustments are needed. So no seperate line on DCF, right?
But if it is 2, then add those to NWC calculations. But would that be correct considering the definition of NWC? And how they are regarded in practice. I guess from your answer both 1 and 2 could be argued. Am I right
TBH it shouldn't really affect your valuation. The reasoning behind that is most people will just flatline "Other Assets" at their current amount in a forecast given that you likely don't know what they are and forecasting them as changing % of X isn't accurate. The only time they will create noise is if they change year over year which would create a source/use of cash.
I wouldn't just assume what those assets are and include them in NWC or assume what they aren't and use a separate line item. I would just hold them flat unless I know what they are
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