Help with 4 technicals
Could someone please help with these 4 technicals below, thank you!
1) Would a company want negative or positive working capital? Amazon has always had negative working capital
2) 4x 75 EBITDA 200 secured 200 unsecured, why would unsecured be trading at 20%, what about 80%?
3) If we were entering a recession how would your working capital change if you kept the same production? How would AR, Inventory, and AP change?
4) Company A EV 600 EBITDA 100 acquires Company B EV 300 EBITDA 30. Assuming the shareholders still value at 6x what would the combined company EV look like? Pretty sure it's 780 but not sure.
1) Would a company want negative or positive working capital? Amazon has always had negative working capital
Depends. It can be seen as a strength if it's related to deferred revenue. A company like Netflix who has people on annual subscriptions would be able to use the large deferred revenue total to pay down Accounts Payable. Or in the case of Amazon, it's because customers pay up front for goods that aren't delivered yet. So in this case, it's a sign of business efficiency. However, it fails to capture the long term picture. In the long term, debtors need to be paid, so always owing more than you have could be concerning (Potential bankruptcy).
2) 4x 75 EBITDA 200 secured 200 unsecured, why would unsecured be trading at 20%, what about 80%?
Not sure what you're asking here. Wdym trading at 20%, are you saying trading at 20.000? If so, I assume you're asking why unsecured debt is trading at more depressed levels compared to the secured... not sure how you end up with a gap this big, but my initial thought is that based on the cap structure those holding the secured debt aren't concerned with repayment (maybe plenty of hard assets backing) versus the unsecured aren't expecting to be paid out with a bankruptcy appearing imminent.
3) Company A EV 600 EBITDA 100 acquires Company B EV 300 EBITDA 30. Assuming the shareholders still value at 6x what would the combined company EV look like?
If the pro forma company is valued at 6x, then it would be 6 x 130 = 780 EV. The standalone EV / EBITDA doesn't matter here.
4) If we were entering a recession how would your working capital change if you kept the same production? ○ How would AR and Inventory and AP change?
Revenue would fall -> decreased accounts receivables. Company would purchase less inventory -> decreased inventory. Purchasing less inventory -> decreased AP. I'd expect current assets to fall more than current liabilities so working capital would decrease.
for question four it's asking if the company kept the same production - so inventory would actually increase. I agree that revenue is decreasing, but if the production is the same your inventory is going to accumulate. Assuming a 50% gross margin, if AR decreases by $100 (due to decreased sales), then inventory would increase by $50. AP would stay the same since you're still buying the same amount from your suppliers. Since AR decrease outweighs inventory increase, and AP stays the same, working capital will decrease. This is ignoring any changes in DPO and DSO. In reality, in a recession, customers will take longer to pay you (some may not pay at all and go out of business in a downturn) and you will take longer to pay your suppliers to maximize cash. So even with a revenue decrease, your AR could actually increase if they take long enough to pay you. But ignoring the timing effects, I would say WC decreases.
Let me know if you agree.
You're right - I didnt take into account that production is staying the same.
#2 can be answered a couple of different ways. One is springers - could have a clause causing accel. maturity if the debt more senior is not re-financed by a certain date.
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