How to calculate working capital?

second one, that is if they give you the breakdown of different line items. If all they give you is CA & CL then that’s all you have to work with.
 
Depends;
As a simple liquidity ratio: CA - CL
For purposes of CF analysis and valuation: [(CA-cash) - (CL-notes)]
 
WCinv is NOT the same thing as working capital.
WCinv is an adjustment to balance sheet data when calculating FCFF or in project evaluation in corp finance
Working capital is CA - CL
Nielsedc formula above is not correct because you have to remove Cash Equiv also from CA and remove CMLTD from CL.
With WCinv you are just trying to see what the incremental cash that was tied up in AR, inventory, WIP on the asset side and AP on the liability side. Notes and CMLTD are interest bearing and so they are left out.
 
Thecodont Wrote:
——————————————————-
> WCinv is NOT the same thing as working capital.
>
> WCinv is an adjustment to balance sheet data when
> calculating FCFF or in project evaluation in corp
> finance
>
> Working capital is CA - CL
>
> Nielsedc formula above is not correct because you
> have to remove Cash Equiv also from CA and remove
> CMLTD from CL.
>
> With WCinv you are just trying to see what the
> incremental cash that was tied up in AR,
> inventory, WIP on the asset side and AP on the
> liability side. Notes and CMLTD are interest
> bearing and so they are left out.
+1
 
So notes payable and short term debt gets subtracted from CL?
 
yes for WCinv but NOT for working capital. It is removed from WCinv because they are interest bearing financing transactions. Also be careful about the concept of ST debt since that is really notes payable. You need to also remove CMLTD
 
I was just hoping to clarify an issue that confused me when I first read the material:
WCinv = investments in working capital : i originally would have assumed it was the change in working capital…which we come to learn as being CA - CL. I just meant that if your doing ratio analysis, this is what you use. If you’re doing cash flow analysis you use the second idea.
And I apologize for not including “cash equivalents”; in my own short hand notation to me it means both.
But you’re right. The technical definition, given on page 393 vol 4 is:
WCinv for the period: =
[(CA - cash and equiv) - (CL - note payables and current portion of LTD)](period t) - [(CA - cash and equiv) - (CL - note payables and current portion of LTD)](period t-1)
 
Great. I just wanted to point out that you need to remove not only cash and cash equiv but also notes AND CMLTD.
anyway, enough of this I gotta get to some Futures material
 
You must log in or register to reply here.
Back
Top