Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

Canworkingcapitalitselfbenegative?Again,theansweris
yes.Firmswhosecurrent liabilitiesexceed noncash current
assets have negative noncash working capital. This is a
thornier issuethannegative changesin workingcapital. A
firmthathasanegativeworkingcapitalis,inasense,using
suppliercreditasasourceofcapital,especiallyiftheworking
capitalbecomesmorenegativeasthefirmbecomeslarger.A
number offirms, with Wal-Mart and Dell being themost
prominentexamples,haveusedthisstrategytogrow.While
thismayseemlikeacost-efficientstrategy,therearepotential
downsides.Thefirst isthatsuppliercredit isgenerallynot
reallyfree.Totheextentthatdelayingpayingsupplierbills
mayleadtothelossofcashdiscountsandotherpricebreaks,
firmsarepayingfortheprivilege.Thus,afirmthatdecidesto
adopt this strategy willhave to compare thecosts of this
capitaltomoretraditionalformsofborrowing.Thesecondis
thata negativenoncash workingcapitalhasgenerallybeen
viewedbybothaccountantsandratingsagenciesasasource
ofdefaultrisk.Totheextentthatafirm’sratingdropsand
interestratespaidbythefirmincrease,theremaybe costs
createdforothercapitalbyusingsuppliercreditasasource.
Asapracticalquestion,westillhaveanestimationproblem
whenforecastingworkingcapitalrequirementsforafirmthat
has negative noncash working capital. As in the previous