Negative Equity Value/Share Price in DCF?
Hi all, I need some help regarding a DCF I made. For some context, the company is an industrial company with very high NWC that significantly reduces FCF. It also has an average 6% operating margin for the past few years. The combination of a low ebit, high increasing NWC, and high debt make it so the EV that my DCF spits out is significantly below the company’s market equity value. In addition, when going from EV to equity value, the small cash and very large debt turns the equity value in my DCF negative, resulting in negative price per share. Any suggestions on if this is normal or any mistakes I might have made? Thank you for the help!
I mean it shouldn’t have forever expanding NWC. At some point, receivables will start to flow in and reverse the cash outflows from the past.
You made a very good point. That led me to figuring out what the average 5 year historical NWC growth was and I found that it’s grown at 16% on average. For the sake of not coming up with a negative share price I decided to reduce that growth to 5% in future projections for FCF that feeds into my DCF. Any other suggestions? I also reduced net PPE/capex growth to 3%. Both changes helped but share price is still 12% of market price
Few things to note.
Happy to expand if you provide more context
Second this. Would also take a look at how you’re projecting NWC since a standalone growth rate on NWC doesn’t really make sense. Maybe try breaking out NWC line by line or see if you can project it on a working capital turnover rate.
Also, based on what you’ve mentioned about slim margins and capital intensity, it would make some sense that you are seeing a negative or low value depending on how high your wacc is. Any info on the company you’re analyzing?
Have u considered that this co is just an overlevered shitco with no equity value
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