Is increase in working capital lucrative for the valuation of a company?

Is increase in working capital lucrative to valuations?

This is a question recently asked to one of our students who was interviewing for the role of an analyst for a leading mid-market advisory company in London with a focus on IPO’s.

An increase in working capital is a negative for the valuations of the company.

Increase in working capital is a cash outflow for the company and increases the capital required to run the operations.

Management of companies, especially that public listed companies and Private Equity funds focus on reducing the working capital investments of a company as that frees up capital to pay equity holders – thus increasing the return for equity investors.

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