Changes in Working Capital or Non-Cash Working Capital?
Hi all,
Currently working on a DCF valuation for Spotify for a course project.
Looking at Spotify's current assets and liabilities, their cash & cash equivalents + short-term investments constitute about 80% of their total current assets. Hence, using "changes in non-cash working capital" in the FCFF calculation would lead to a way higher FCFF compared to when using "changes in working capital", since their current liabilities have been increasing a lot more compared to their non-cash current assets.
Which of the two would you guys advise me to use, considering the type of business Spotify is? I'm guessing I should just stick with the change in non-cash working capital.
Thanks a lot
You could cut it down the middle and just use cash required for operations. This is usually modeled around 2% of revenue. Just a suggestion, hope this helps a little.
Thanks for the reply! Do you mean splitting cash into operating cash (take a % of revenue) and excess cash, and deducting the excess cash from Current Assets?
If yes, is 2% a reasonable percentage to assume for operating cash for a company like Spotify, or perhaps a bit higher?
Yes, that is what I was suggesting. Normally 2% is normally what gets foretasted. However, if you feel like they need more cash to operate then model it between 3-5%.
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