Why strip out cash and non-interest debt in NOWC?
Is there a particular reason why cash and debt is not considered operating working capital?
Why makes this a better proxy for free cash flow than NWC?
Is there a particular reason why cash and debt is not considered operating working capital?
Why makes this a better proxy for free cash flow than NWC?
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Well in terms of measuring working capital for valuation purposes, cash and investments in marketable securities are cut out from current assets because unline inventory, AR and other current assets, cash earns a fair return and shouldn't be included in measures of working cap.
Debt is also not considered because it will be considered when computing cost of capital and it would inappropriate to count it twice.
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