Estimating Working capital


Working capital % is an aggregate of three items, which of every one is used to estimate one Balance sheet parameter:

How to choose percentage values?

It is reasonable to assume that company remains the same level of working capital related to net sales as in history. For example usually when net sales grows, inventories grow too. And since receivables consist mainly of sales receivables, most probably also receivables increase.

So when you consider values for these three parameters, start with the last history year values or some average value from the latest history years.

Fine tuning

Since it is important for companies that working capital would tie as little capital as possible, they have a tendency to lower for example inventories level. You may see this in historical Inventories %, as the value may have come down year-by-year, and thus assume that this trend would continue also in the future.