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Working Capital Explained
• Working Capital = Current Assets − Current Liabilities
• Measures a company's short-term liquidity and ability to meet near-term obligations.
Current Assets
Cash & cash equivalents
Accounts receivable
Inventory
Marketable securities
Other current assets
Current Liabilities
Accounts payable
Short-term debt
Accrued expenses
Other current liabilities
Why it matters
Positive working capital = Better financial flexibility.
Negative working capital = Possible liquidity stress (though some businesses operate efficiently with negative working capital).
3 Ways to Calculate
Simple: Current Assets − Current Liabilities
Narrow: (Current Assets − Cash) − (Current Liabilities − Debt)
Operating Working Capital: Accounts Receivable + Inventory − Accounts Payable
Quick Rule
Too much working capital can mean idle assets.
Too little can lead to cash flow problems.
The best businesses maintain an efficient balance, not necessarily the highest working capital.
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Financial Ratios Every Investor Should Know
Want to understand a company's financial health? Start with these key ratios.
💰 Profitability
Gross, Operating & Net Profit Margin
ROA (Return on Assets)
ROE (Return on Equity)
EPS (Earnings Per Share)
🏦 Liquidity
Current Ratio
Quick Ratio
Cash Ratio
📈 Efficiency
Inventory Turnover
Receivables Turnover
Asset Turnover
Cash Conversion Cycle
⚖️ Leverage & Solvency
Debt-to-Equity
Debt-to-Assets
Interest Coverage
💵 Cash Flow & Growth
Free Cash Flow to Equity (FCFE)
Free Cash Flow to Firm (FCFF)
Sustainable Growth Rate
Dividend Payout Ratio
Key takeaway: Don't judge a company by one ratio alone. Compare its ratios over time and against industry peers to get a clearer picture.
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📊 8 Valuation Multiples Every Investor Should Know
Different multiples help answer different questions about a company’s valuation.
P/E: How much investors pay for every rupee of earnings.
PEG: Whether a stock’s valuation looks reasonable relative to earnings growth.
EV/EBITDA: Values a business relative to its operating earnings.
EV/Sales: Compares enterprise value with revenue, useful when profits are low or negative.
P/B: Compares market value with book value, often used for banks and financial companies.
P/Tangible Book: Compares market value with tangible net assets.
P/FCF: Shows how much investors pay for each rupee of free cash flow.
Dividend Yield: Measures annual dividends relative to the share price.
💡 Key takeaway: No single multiple works for every company. The right metric depends on the business model, profitability, growth and industry.
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Terminal Value: 2 Methods Every Finance Professional Should Know
Terminal Value (TV) estimates a business’s value beyond the explicit forecast period in a DCF model. It can account for a significant portion of total valuation.
1. Perpetuity Growth Method
Assumes cash flows grow at a constant rate forever.
Formula: TV = FCFₙ₊₁ / (WACC − g)
Best suited for mature businesses with stable, predictable cash flows.
2. Exit Multiple Method
Assumes the business is valued using a market multiple at the end of the forecast period.
Formula: TV = Terminal Metric × Exit Multiple
Common multiples: EV/EBITDA, EV/EBIT and P/E.
What should you remember?
The perpetuity growth rate must be below WACC for this formula to work.
Exit multiples should reflect comparable companies and market conditions.
Always test how changes in WACC, growth rates and multiples affect valuation.
💡 Key takeaway: Terminal Value can drive a large part of a DCF valuation, so choosing reasonable assumptions is critical.
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