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Estimating reinvestment rate


WeiChiLoh

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Does it make sense for a company to have a positive reinvestment rate in a FCFF calculation? It kind of make sense for me as the company I am analyzing is in a declining industry, and thus they should start harvesting their working capital as rev decline.

 

Now. What if the company has negative working capital ratio and is in a declining industry. Does this mean that working capital actually goes up as rev decline, which further squeezes FCFF?

 

Am I right?

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Does it make sense for a company to have positive a positive reinvestment rate in a FCFF calculation? It kind of make sense for me as the company I am analyzing is in a declining industry, and thus they should start harvesting their working capital as rev decline.

 

Now. What if the company has negative working capital ratio and is in a declining industry. Does this mean that working capital actually goes up as rev decline, which further squeezes FCFF?

 

Am I right?

 

I believe you are right. I think this is what happened when Dell's sales declined.

 

Kind of like the opposite of a 'normal' working capital intensive company.

;)

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