Hello,
I was hoping someone could explain a rough WC approximation I came across during my internship. The analyst took the following as a rough proxy for WC:
Receipts from customers - payments made to suppliers - EBITDA
Could someone explain the intuition here please?
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I don’t get why you would do that - if you have the detail necessary for recipes/payments I’d bet you have the info necessary to just calculate actual net working capital
Intuitively I’m not sure that formula makes sense anyways
Don't know that I agree with the methodology, but I think the idea is to capture:
(Cash coming in) - (Cash going out) - (Net change that flows through I/S), so that the WC that's being used in a calculation off of Net Income or EBITDA isn't "double-counting" what's already flowing through the I/S.
Again, think there are several level of assumptions that need to be made here for this to be a fair approach / I would probably not use this as an approximation.
One of the analysts went through it with me at the time and it made sense but I have forgotten his explanation. It did however, ring along the lines of your explanation.
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