Examples of net working capital in the following topics:
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- Free cash flows = EBIT x (1 - Tax rate) + Depreciation & Amortization - Changes in Working Capital - Capital Expenditure
- Free cash flows = Net profit + Interest expense - Net Capital Expenditure (CAPEX) - Net change in Working Capital - Tax shield on Interest Expense
- Free cash flows = Profit after Tax - Changes in Capital Expenditure x (1-d) + Depreciation & Amortization x (1-d) - Changes in Working Capital x (1-d)
- The net income measure uses depreciation, while the free cash flow measure uses last period's net capital purchases.
- The second difference is that the free cash flow measurement deducts increases in net working capital, where the net income approach does not.
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- Along with fixed assets, such as plant and equipment, working capital is considered a part of operating capital.
- Net working capital is calculated as current assets minus current liabilities.
- If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
- Decisions relating to working capital and short-term financing are referred to as working capital management.
- The management of working capital involves managing inventories, accounts receivable and payable, and cash.
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- Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital.
- Net working capital is calculated as current assets minus current liabilities.
- If current assets are less than current liabilities, an entity has a working capital deficiency, also called a "working capital deficit. "
- We can find working capital by:
- The common commercial definition of working capital for the purpose of a working capital adjustment in a mergers and acquisitions transaction (i.e., for a working capital adjustment mechanism in a sale and purchase agreement) is equal to:
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- Working capital is considered a part of operating capital along with fixed assets, such as plant and equipment.
- However, too much working capital can carry with it a higher cost of capital.
- When calculating working capital, we think in terms of net working capital, which is calculated as current assets minus current liabilities.
- If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
- Describe the goals of a business in the context of ts working capital needs
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- A business's Statement of Cash Flows illustrates it's calculated net cash flow.
- The total net cash flow is composed of several factors:
- This includes cash earnings plus changes to working capital.
- Over the medium term, this must be net positive if the company is to remain solvent.
- Investment cash flows: Cash received from the sale of long-life assets or spent on capital expenditure, such as, investments, acquisitions, and long-life assets.
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- The main considerations of working capital management decisions are (1) cash flow/ liquidity and (2) profitability/return on capital.
- Working capital is the amount of capital which is readily available to an organization.
- Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital, which results from capital investment decisions as above.
- Another factor affecting working capital management is credit policy of the firm.
- Cash conversion cycle is a main criteria for working capital management.
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- Working capital is the amount of capital that is readily available to an organization.
- As a result, the decisions relating to working capital are almost always current, i.e., short term, decisions.
- In other words, working capital management differs from capital investment decisions - specifically in terms of discounting and profitability.
- Working capital management applies different criteria in decision making.
- The most widely used measure of cash flow is the net operating cycle or cash conversion cycle.
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- Working capital (WC) is a measurement of a company's operating liquidity.
- Working capital (WC) is an important metric for all businesses, regardless of their size.
- Start-ups need to pay attention to their WC because it is the amount of money they need to keep the business running until they break-even (start earning a net profit).
- On the other hand, too much working capital means that some assets are not being invested for the long-term, so they are not being put to good use in helping the company grow as much as possible.
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- Gross margin, Gross profit margin or Gross Profit Rate: Gross profit / Net sales
- Profit margin, net margin or net profit margin: Net profit / Net sales
- Thus, the ratios of firms in different industries, which face different risks, capital requirements, and competition are usually hard to compare.
- Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS.
- Thus, the ratios of firms in different industries, which face different risks, capital requirements, and competition are usually hard to compare.
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- Recognize the broader objectives of working capital, as well as how organizations can consider a long-term perspective when viewing the utilization of working capital.
- This free working capital can be utilized in a variety of ways.
- From a longer-term perspective, working capital profitability decisions revolve around how much should be available within any short-term time frame in order to maximize the return (on average) of existing working capital.
- By looking at differences in working capital availability over a long period of historical data, the organization can make rough estimations of the optimal amount of working capital availability that allows optimal growth.
- Identify the primary objectives of working capital, and how a longer-term perspective can offer insights