Read more on working capital in valuation
Data on working capital needs by sector
consider all cash, operating cash or no cash at all when you
compute working capital?
The entire reason we consider working
capital when computing cash flows is because investments in working
capital are considered wasting assets that don't earn a fair
rate of return. Thus, money invested in inventory is wasted because
inventory sits on your shelves and does not earn a return. Until
a few decades ago, the same could be said of cash that would
be invested in a checking account. Today, cash at most reasonably
run publicly traded firms is invested in commercial paper or
treasury bills, earning a low but a fair rate of return (given
the lack of risk in these investments). Hence, cash is no longer
a wasting asset at most firms and should not be considered part
of working capital.
There should be no distinction drawn
between operating and non-operating cash for purposes of this
analysis. Even if a company needs cash for its operations (a
retail firm like Walmart has to maintain large cash balances),
if that cash is invested in financial assets like commercial
paper, it should not be considered part of working capital because
it isnot a wasting asset.
you consider short term debt as part of current liabilities?
All interest bearing
debt, whether short term or long term, should be considered part
of debt for computing cost of capital. Consequently, short term
should not be considered part of current liabilities to compute
working capital. Supplier credit, accounts payable and accrued
items (salaries, taxes etc), should be considered as part of current