I am relatively new to investing and am trying to understand the concept of working capital.
As I understand, working capital is the cash that the company requires to carry out its business. But it is still cash in some sense and is probably equivalent to having ‘inventory’. Now for a reasonable business, it is unlikely that the inventory will be completely worthless, maybe it will be only 60% or 50% of todays value, but it still has value.
My question is, can working capital be considered as margin of safety?
Not sure if I follow your question, but if you meant can working capital be taken into consideration when assigning value of the company, my view is in most cases “no”. The reason being for most business going belly up, the value of inventory is probably nothing except if you are a gold retailer or property developer.
Adding to that normally markets do not prefer companies with higher working capital .Even some of the real estate companies are moving towards asset light business models to reduce their working capital(Godrej properties andAshiana housing ).Sintex Industries is an example which got affected with higher working capital in their monolithic business( now to reduce their working capital they are going slow on this segment).
Also one should give due consideration to changes in working capital / cash flow especially with companies dealing with govts. Revenue is recognized once the product is delivered however the real cash may take long time to come. I think this to be one of the reasons for fall of companies like Sintex , jain irrigation etc. if I remember correctly, HCC was claiming abt 600 cr due from govt just from Worli sea link projecct.
One of the means is to check the trade receivables n loans and advances section for any abnormal rise.
