The Importance of Working Capital
Aside from being a measure of a company’s liquidity and financial health, working capital is a window into the efficiency of a company and may also serve as a signal of competitive advantages. It is useful to think of working capital as a support mechanism for revenue; for every dollar of revenue, a certain amount of capital is needed for support. It is analogous to the pillars supporting a bridge, the more pillars are needed the higher the load of the bridge. As investors, we care about the cash flows a business generates and understanding working capital helps us better forecast those cash flows...