Debt free working capital
Dose everyone know what is debt free working capital? how to calculate it? And why it is good for wc projections?
Thanks
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This is called "net" working capital.
Non-cash current assets (so minus cash, cash/equivalents) minus Non-cash current liabilities (minus any current portion of long-term debt, capital lease obligations, etc.)
The idea is that "short-term" cash and debt can be easily manipulated. I.e., you could borrow $100 mil today and your cash could shoot up, with the liability being reflected in long-term debt. This is would skew the numbers and not represent the true "cost of funding the business"
That's my understanding, but i defer to someone more knowledgeable about finance/accounting to chime in
Great. Thanks!
Valuation Question -Working Capital Line of Credit (Originally Posted: 12/28/2009)
When conducting a DCF using FCFF and then backing into the equity value of the firm by subtracting net debt and adding excess cash how do you treat a company's working capital line of credit?
This has been a point of ongoing debate at my firm. Our policy in general is to treat it on a case by case basis. Sometime we include the WK line of credit in our calculation of net debt given that it often doesn't revolve and thus we deem it LT debt that had been inappropriately structured/used. We have also included it in our calculation of net debt if a company doesn't have enough A/R built up on the BS to satisfy the balances in conjunction with its other current payables. Other times we ignore it altogether concluding that it can and will be serviced by the the liquidation of A/R. How do you treat it?
Related to this is the inclusion of the WK line in calculating the WACC. I've always included it given it's interest bearing but have heard others don't. Thoughts?
I think the main consideration is whether it's material or not. If the overall debt load dwarfs working capital then why incur the brain damage?
Understood. For the purposes of discussion let's say it is material. I've heard varying opinions, regardless of materiality for including and not including the working capital line. Curious how others view this.
Does your WK line of credit have a control change convenant ? (not sure if this is how you say it in English - means it has to be payed backed if company is sold)
If yes it would be part of company's debt and not working cap.
Use the average level over the course of the year
Difference between Working Capital and Operating Working Capital? (Originally Posted: 11/03/2015)
I understand that WC is a proxy for liquidity and = curr. A- curr L But why do you subtract cash & cash equivalents from curr. A and debt from curr. L when calculating Operating Working Capital? Maybe I'm not understanding the difference between the two?
Thanks in advance
bump
Working Capital = Current Assets - Current Liabilities Operating Working Capital = Operating Current Assets - Operating Current Liabilities Since cash & cash equivalents are not operating assets, they are removed from OCA
Excuse my ignorance, but why aren't cash & cash equivalents operating assets? Don't you need cash to run a business' operations?
Valuation Question -Working Capital Line of Credit (Originally Posted: 12/28/2009)
When conducting a DCF using FCFF and then backing into the equity value of the firm by subtracting net debt and adding excess cash how do you treat a company's working capital line of credit?
This has been a point of ongoing debate at my firm. Our policy in general is to treat it on a case by case basis. Sometime we include the WK line of credit in our calculation of net debt given that it often doesn't revolve and thus we deem it LT debt that had been inappropriately structured/used. We have also included it in our calculation of net debt if a company doesn't have enough A/R built up on the BS to satisfy the balances in conjunction with its other current payables. Other times we ignore it altogether concluding that it can and will be serviced by the the liquidation of A/R. How do you treat it?
Related to this is the inclusion of the WK line in calculating the WACC. I've always included it given it's interest bearing but have heard others don't. Thoughts?
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