Mistake #6 Underestimating working capital investment | 9 Valuation mistakes

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My name is Andrew Stotz and I've been valuing companies for decades. When I was Head of Research at CLSA, I was voted the No. 1 Analyst in Thailand two years in a row.

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Mistake #6 Underestimating working capital investment

In this video, I define common valuation mistake #6 Underestimating working capital investment.
Keynotes:
• Net working capital (NWC) from a valuation perspective versus an accounting perspective.
• Net working capital components: accounts receivable, inventory, other current assets, accounts payable, and other current liabilities.
• Cash flow forecast calculation.
• Working capital calculation and the change in working capital that matters for forecasting in valuation.

What you will learn from this video:

• Unlike in account, in valuation, we exclude cash and short-term borrowing from net working capital
• Changes in Net working capital (NWC) are volatile because it results from five separate forecasts
• Net working capital (NWC) is a small but volatile investment item. Large deviations from past trends usually are a mistake, so required detailed explanation.

Want to know more about common valuation mistakes. Follow the links below:

1 Overly-optimistic revenue forecasts
   • Mistake #1 Overly-optimistic revenue forec...  

2 Underestimating expenses causing unrealistic profit
   • Mistake #2 Underestimating expenses causin...  

3 Growing fixed assets slower than revenue
   • Mistake #3 Growing fixed assets slower tha...  

4 Confusing growth with maintenance Capex
   • Mistake #4 Confusing growth with maintenan...  

5 Forecasting drastic changes in cash conversion cycle
   • Mistake #5 Forecasting changes in cash con...  

6 Underestimating working capital investment
   • Mistake #6 Underestimating working capital...  

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