Summary
When calculating free cash flow, an increase in the change in NWC should be subtracted from the cash flow amount, while a negative change should be added to the cash flow amount.
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This is because when figuring out the cash flow that is available to investors, the money that is invested into the business through NWC must be accounted for.
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The "change" refers to how the cash flow has changed based on the working capital changes, and investors should understand this when analyzing and valuing companies.
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According to
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Summary
When calculating free cash flow, whether it be on an unlevered FCF or levered FCF basis, an increase in the change in NWC is subtracted from the cash flow amount.
But if the change in NWC is negative, the net effect from the two negative signs is that the amount is added to the cash flow amount.
Change in Net Working Capital (NWC) | Formula + Calculator
wallstreetprep.com
Summary
You subtract the change in NWC capital from free cash flow because when figuring out the cash flow that is available to investors - you must account for the money that is invested into the business through NWC.
It is important to note that cash should not be included in current assets.
Change in Net Working Capital Formula | Wall Street Oasis
wallstreetoasis.com
Summary
Working capital is a balance sheet definition which only gives you insight into the number at that specific point in time, but the real purpose any business needs working capital is to continue operating the business. Working capital is broken down to consider the operating aspects only, and the "change" refers to how the cash flow has changed based on the working capital changes. Investors should understand what the change part means and how to interpret and use it when analyzing and valuing companies.
Changes in Working Capital, FCF and Owner Earnings
oldschoolvalue.com
