Excess Working Capital

[nickenumbers]

How do you calculate excess working capital when performing a FCF DCF, to add back?

 

What about Cash, AR, AP, ST Debt and LT Debt?

 

 

I am trying to tighten up my thinking around DCF with different balance sheet structures.  Thank you!

[LC]

Difficult to get an accurate figure.

 

You can calculate the working capital accounts as a % of revenues or assets, over a period of years (assuming no major change in business operations) to get a general sense of usage.

 

Then you can compare your averages %s to current amounts.

[mjs111]

I agree with LC that you have to look at a number of years and look at averages and trends.  It's a bit more of a judgment call if you only ding a company for excess working capital in a valuation vs. just a historical average of working capital usage, since what is "excess" is your judgment call.  You may think a company has a ton of excess cash but then they might go do a big acquisition one day and a lot of that cash is gone.

 

For myself I just use working capital as a percentage of revenue in past years as a reference point, and ding future cash flows by a similar percentage of revenues going forward. I might adjust downward if I'm virtually certain the company will increase returns to shareholders over the medium term future.  Apple is an example here, where management has repeatedly said it will bleed working capital down and increase returns to shareholders, and it has provided evidence of doing so. So going forward with Apple, I ding free cash flow by a smaller percentage of working capital needs than what Apple has needed in the past.

 

 

Mike