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Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital is equal to current assets.
Changing in net working capital: it is the cost or revenue related to the company's short-term asset like inventory. Capital spending: this is the cost or gain related to the company's fix asset such as the cash used to buy a new equipment or the cash which is gained from selling an old equipment.
For example, a company with numerous fixed assets on its books (e.g. factories, machinery, etc.) would likely have decreased net income due to depreciation; however, as depreciation is a non-cash expense [5] the operating cash flow would provide a more accurate picture of the company's current cash holdings than the artificially low net income. [6]
Working capital is an important metric because of what it says about management's ability to deploy capital for expansion or acquisitions. Think of it like you would Major League Baseball's ...
The second difference is that the free cash flow measurement makes adjustments for changes in net working capital, where the net income approach does not. Typically, in a growing company with a 30-day collection period for receivables, a 30-day payment period for purchases, and a weekly payroll, it will require more working capital to finance ...
Net Working Capital is usually computed as: Account Receivables + Inventories – Account Payables. Both definitions lead to the same measure of Capital Employed. One prefers the first one when computing Capital Employed at the firm level; the second one is more practical when focusing on a company's business unit.
NI is the firm's net income; D&A is the depreciation and amortisation; b is the debt ratio; Capex is the capital expenditure; ΔWC is the change in working capital; Net Borrowing is the difference between debt principals paid and raised; In this case, it is important not to include interest expense, as this is already figured into net income. [4]
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