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Meaning of working capitalChange in working capitalFactors affecting change in working capitalFrequently asked questions

Working capital or Working capital is not too strange for managers.

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Because for them, this is an extremely important indicator.

It shows the available resources of the business, to ensure that basic activities are taking place normally.

However, it is often difficult for investors to imagine what working capital is?

In this article, let’s go to GoValue to learn in detail about working capital, how to calculate and apply this index in forecasting future cash flows of the business.

But first, we will learn the basic concepts of working capital.

What is working capital?

Working capital is a financial measure that shows the available resources for the day-to-day operations of a business.

For example: Money to buy new raw materials, salary for employees, payment of due bank debts…

No matter how profitable a business is, if it does not meet enough working capital, it will also cause business disruption.

More serious can lead to bankruptcy.

How to calculate working capital

Working capital is calculated by:

VLD = Current assets – Current liabilities

You can easily get the current assets and current liabilities on the financial statements (balance sheet) of the business.

An example of Binh Minh Plastic JSC (Code: BMP) in 2019 was obtained by GoValue on the Cafef page.

Because the nature of the audit process is sampling.

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It will be difficult to determine all accounts receivable, inventory is accurate or not?

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Especially when the information disclosed in the financial statements is still very limited and unclear.

GoValue does not claim the business is cheating.

It is very normal for a change in working capital to lead to a negative operating cash flow in the operating life of a company.

However, if you don’t really understand the business well…

It is not foolish to assume that the business will earn money in the future, right?

Some frequently asked questions

#first. How to calculate change in working capital?

The change in working capital (non-cash) can be calculated in two ways:

Method #1: Working capital this year – Working capital last year

Option #2: (Receivables + inventory – payable to sellers) this year – (Receivables + inventory – payable to sellers) last year

= Change in short-term receivables + change in inventory – change in short-term trade payables

#2. Why is working capital not counting the cash part

?Working capital when used to calculate cash flow valuation for shareholders will be omitted cash, because the cash part is a highly liquid asset. best.

Owners (including, creditors and shareholders) can immediately use this cash to offset related obligations.

The cash part will be excluded when discounting cash flows, however, the discounted cash flow value will be included in the cash part to calculate the final business value.

Bottom lines

In short, the increase in working capital is very normal in the business activities of the enterprise.

In investment analysis, VLD and Change in VL are used a lot in calculating a company’s cash flow (DCF Valuation Method).

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This change depends on the following main causes:

Competitive advantage of the enterprise Business cycle of the enterprise Transparency of the enterprise

You should be careful and find out the reason carefully if the change in the working capital of the business (negative operating cash flow) continuously increases for a long time.