Is increase in working capital lucrative to valuations?

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Is increase in working capital lucrative to valuations?

This is a question recently asked to one of my students who was interviewing for the role of an M&A analyst for a leading mid-market advisory company in London with a focus on IPO’s.

Increase in working capital is a cash outflow and increases the capital required to run the day to day operations of the company. An increase in working capital is a negative for the valuations of the company. Management of public listed companies and Private Equity funds focus on reducing working capital investments of a company as it frees up capital that can be used to pay back equity holders – thus increasing return for investors.

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