Investment, Coding and Actuary

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Working, working, working Capital!

The Working Capital, as is commonly known as “the capital that actually gets to work” (James, 2014), is simply the current assets minus current liabilities.

It’s the best way to judge how much a company has in liquid assets to build its business, fund its growth, and produce shareholder value.

We can divide Working Capital by the market capitalization (outstanding shares * share price – long-term debt – preferred shares). If the ratios is greater than 50% then the company is in great shape. However for some retailers it is better to take inventories from working cap before doing the ratio.


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Balance Sheet: A review of the B/S

Most of the information in this post is from:

The balance sheet is a record of a company’s assets and liabilities — in short, what it’s already got or expects to get soon, and what it owes to others.

Shareholder value ultimately comes from liquid assets — assets that can easily be converted into cash. The amount of liquid assets a company can amass ultimately determines its value. Better yet, if a company generates more liquid assets than it needs to fund its operations, it can give the excess back to shareholders in the form of dividends or share buybacks.

There are two ways to measure liquid assets. The first is terminal value — how much the company would return to shareholders if, at some future point, it closed down all its operations and turned everything into cash. The second is tangible shareholder value — the returns on invested capital generated by the company’s operations.

Most investors spend too much time obsessing over a company’s earnings, and too little time studying the balance sheet and its cousin, the statement of cash flows. The balance sheet can tell you whether a company’s got enough money to keep funding growth, or whether it’ll have to take on debt or issue bonds or additional stock to sustain itself. Does a company have too much of its money tied up in inventory? Is the company collecting money from its customers reasonably quickly? The balance sheet knows all. Continue reading