What Does Working Capital Mean? Wal-Mart vs. Amazon vs.

Salesforce
($ in Million Except Per Share Data)
Key Points of This Lesson:
1. Why Does This Matter? Can find lots of definitions online on Investopedia, Wikipedia,
About.com, etc. but most of these places miss the point when it comes to "Working Capital"
They define it for you - Current Assets minus Current Liabilities - but they focus too much on
the WHAT and not the WHY - why does it matter? How do you use it?
First thing to understand is that it's really the CHANGE in Working Capital that matters for
valuation and financial modeling purposes.
Like the difference between velocity and acceleration in physics
Working Capital, by itself, does not tell you a terrible amount and could mean many different
things but when you also look at the CHANGE in WC, what it is as a % of revenue and other
metrics, AND the company's business model, that's when you start gaining insights.
2. So, What Does the "Change" in WC Mean?
"Official" definition of Working Capital is Current Assets minus Current Liabilities, so
you could start from that but that's not really the best way to think about this.
For one, cash and debt should be excluded altogether because those are NOT operational
line items.
For another, it's easier to think of this in terms of the individual items that comprise these
"Operating" Assets and Liabilities.
Most Common Current, Operating Assets: Accounts Receivable, Inventory, and Prepaid
Expenses.
What do they all have in common? You've paid for them upfront in cash, or they represent
payments you're waiting on (AR) - in other words, INCREASING any of these costs you cash!
Most Common Current, Operating Liabilities: Deferred Revenue, Accounts Payable, and
Accrued Liabilities.
You either get the cash upfront (DR), or you effectively get more cash because you're paying
for something later (the last two).

So with the "Change" in Working Capital, you're seeing which group of items increases
by a higher amount - Current Assets Excl. Cash or Current Liabilities Excl. Debt.

If this Change is NEGATIVE, then Current Assets are increasing by MORE than Current Liabilities!
Interpretation: Company might be spending a lot on Inventory, might be waiting too long
for customer payments, might be paying suppliers very quickly
If this Change is POSITIVE, then Current Liabilities are increasing by more than Current Assets!
Interpretation: Could be collecting a lot of cash upfront, might have no or minimal inventory,
or might just be delaying payments to suppliers.
Let's go to the examples to show you a few real world interpretations
Wal-Mart - Working Capital Excerpt from Cash Flow Statement:
Changes In Certain Assets and Liabilities:
Year 1
Year 2
Accounts Receivable:
$
(733) $
(796)
Inventories:
(3,205)
(3,727)
Accounts Payable:
2,676
2,687
Accrued Liabilities:
(280)
(935)
Accrued Taxes:
(153)
994
Net Change in (Operating) Working Capita
(1,695)
(1,777)
Annual Revenue:
Annual Net Income:

Net Change as a % of Revenue:

Net Change as a % of Net Income:

421,849 $
16,993
(0.4%)
(10.0%)

446,950
16,387
(0.4%)
(10.8%)

Interpretation: Always negative due to huge Inventory expenditures - since WMT is a

retailer, it MUST pay for Inventory in advance before selling it
It does keep suppliers waiting a fair amount since its AP balance is also high and increasing
each year, but Inventory spending outweighs that.
This means that as Wal-Mart's business grows, it requires ADDITIONAL cash to keep
funding it and keep growing it due to the Inventory that must be paid for in advance!
Now, as a % of revenue and net income, this is quite small, so it would never have to raise
equity/debt funding or anything like that, but it also doesn't get any type of "bonus cash"
as its business grows.
Valuation: This will reduce Free Cash Flow (though not by a massive amount), thereby
reducing Wal-Mart's valuation in a DCF analysis.

Recap: So What Does Working Capital Mean?

Well, by itself, not very much... the CHANGE in working capital, however, is huge!
Gets you closer to how much cash flow a company is really generating.
The key question it answers: As the business grows, does it generate MORE cash than you
expect or it does it REQUIRE additional cash to grow?
Makes a big difference for a DCF analysis when you value a company based on its
cash flows, but also makes a difference for how much funding the business needs to grow,
and even what happens when that business gets acquired.
One final point to think about: we've focused on WC from the perspective of the company,
but what about how it impacts the customers and suppliers of the business?
Are certain business models better or worse for them? Do company policies that benefit
the company's stock price and investors hurt the average person?
Something to think about...

vestopedia, Wikipedia,
mes to "Working Capital"

they focus too much on

apital that matters for

uld mean many different

a % of revenue and other
aining insights.

nt Liabilities, so
about this.

e are NOT operational

s that comprise these

Inventory, and Prepaid

in cash, or they represent

f these costs you cash!

e, Accounts Payable, and

h because you're paying

h group of items increases

abilities Excl. Debt.

ORE than Current Liabilities!

ght be waiting too long

more than Current Assets!

e no or minimal inventory,

retations
Amazon - Working Capital Excerpt from Cash Flow Statement:
Year 3
$
(614)
(2,759)
1,061
271
981
(1,060)
$

469,162
17,756
(0.2%)
(6.0%)

es - since WMT is a

Changes In Operating Assets and Liabilitie

Year 1
Accounts Receivable:
$
(866)
Inventories:
(1,777)
Accounts Payable:
2,997
Accrued Liabilities:
1,067
Deferred Revenue:
43
Net Change in (Operating) Working Capita
1,464
Annual Revenue:
Annual Net Income:
Net Change as a % of Revenue:
Net Change as a % of Net Income:

48,077
631
3.0%
232.0%

Interpretation: Amazon is still spending a lot on inventory and actually, as a %

the change is higher than Wal-Mart's each year BUT it is also not paying supplie
and is accruing a higher Accounts Payable balance each year.

so high and increasing

For WMT, the increase in Inventory exceeds the increase in AP every year for Am
the opposite!

DDITIONAL cash to keep

t be paid for in advance! Lots of stories of Amazon delaying payments to suppliers for months and months
Wal-Mart aims to pay within 30-45 days.
ld never have to raise
type of "bonus cash"
Plus, Amazon has that Deferred Revenue coming in - customers pay upfront for ite
will be delivered later. Amazon gets the cash NOW, further improving its cash flow

e amount), thereby

Valuation: This will increase Amazon's FCF and boost its valuation in a DCF since
WC far exceeds Net Income here - far more of an impact than for Wal-Mart.

ever, is huge!

rate MORE cash than you

y based on its
siness needs to grow,

ctive of the company,

policies that benefit

w Statement:

Salesforce - Working Capital Excerpt from Cash Flow Stateme

Year 2
Year 3
$
(861) $
(846)
(999)
(1,410)
2,070
1,888
1,038
736
275
399
1,523
767
$

61,093 $
(39)
2.5%
(3905.1%)

74,452
274
1.0%
279.9%

ventory and actually, as a % of revenue

T it is also not paying suppliers as quickly

Changes In Operating Assets and Liabilitie

Accounts Receivable:
Deferred Commissions:
Prepaid Expenses:
Accounts Payable:
Deferred Revenue:
Net Change in (Operating) Working Capita
Annual Revenue:
Annual Net Income:
Net Change as a % of Revenue:
Net Change as a % of Net Income:

Interpretation: No inventory! It's a software/subscription compan

BUT we still have AR (just like almost any company), and Deferred
upfront to sales reps in cash and then recognized over term of sub

ase in AP every year for Amazon it's

liers for months and months whereas

customers pay upfront for items that

urther improving its cash flow.

The Net Change still ends up being positive, though, thanks to tha
each year subscriptions are often sold months or years in advan
and then revenue is recognized over time.

Great situation for company! Get all that cash right away, which bo

So as Salesforce grows, if DR keeps increasing as it has been, com

and will not need anything extra to fund its business.

st its valuation in a DCF since the change in

pact than for Wal-Mart.
Valuation: This will increase Salesforce's FCF by a good amount, s
and therefore boost its valuation in a DCF.

pt from Cash Flow Statement:

Year 1
Year 2
Year 3
$
(245) $
(183) $
(425)
(167)
(233)
(265)
(8)
(10)
105
80
193
(29)
445
479
612
105
247
(1)
$

2,267 $
(12)
4.6%
(907.5%)

3,050 $
(270)
8.1%
(91.4%)

4,071
(232)
(0.0%)
0.5%

software/subscription company, so that helps a lot

any company), and Deferred Commissions - must be paid

n recognized over term of subscription (similar to Prepaid Expenses).

ositive, though, thanks to that huge increase in Deferred Revenue

old months or years in advance, cash is collected UPFRONT,

hat cash right away, which boosts its cash flow.

ncreasing as it has been, company will get "bonus cash"

und its business.

rce's FCF by a good amount, since its Net Income is negative,