Difference between NWC in Acct vs Valuation?
In my accounting class, we learned that working capital was current assets- current liabilities. I've been reading rosenbaum, and they say that net working capital is non-cash current assets - non interest bearing current liabilities.
Based on this, I get that cash is not used in current assets for net working capital. Would notes payable not be used for current liabilities? Also, would maturing principal debt not count in current liabilities even if it's going to be paid back within a year? I'm guessing so because both of these would be interest bearing. Are there any other accounts I should be aware of not to include in NWC?
My understanding about why there's a difference between the accounting NWC definition and the valuation NWC definition is that they serve different purposes. In accounting, you are trying to see the liquidity of the company and its ability to meet short-term obligations, so cash and maturing notes payable and long term debt is fair game.
However, in valuation, we are using the net working capital to get the projections of free cash flow. In that case, cash would be useless to include in net working capital because that is what we are trying to find for the overall life of the company. Similarly, for notes payable and maturing debt, there is an interest expense component and the whole point of a DCF is to use unlevered cash flow, so we can calculate enterprise value. Including current liabilities that were interest bearing would defeat that purpose.
Is my logic correct? Is there a better explanation for why interest bearing current liabilities and cash aren't included in NWC?
EDIT: Is there a difference between WC and NWC? Is that the main reason why my accounting class had a different definition? The two terms are different?
Thanks for the help!
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