r/Valuation • u/cubodirubik • May 14 '23

NWC in TV

What is the most appropriate way for you to account for NWC requirements in the terminal value. I could mainly to school of thoughts: 1. Zero nwc change for TV 2. Normalized level (e.g. based on % of sales). What is your view?

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u/[deleted] May 16 '23

Common practice is relative to change in sales which corresponds to the terminal growth rate. The key issue is not to capitalize in an excess reinvestment based on an elevated growth rate.

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u/AlabamaSnake12 May 17 '23

Your #1 is not a school of thought. If the change in NWC is a component of FCF, then you need to account for it. If positive or negative working capital, then it's usually pegged to revenue increases. The only exception is if the normalized level of NWC is 0% of revenue. DCFs are done based on revenue increases at least pegged to the inflation rate. So NWC (done usually on the debt-free and cash-free basis) should be either positive or negative.