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http://valuationmasterclass.com/ My name is Andrew Stotz and I've been valuing companies for decades. When I was Head of Research at CLSA, I was voted the No. 1 Analyst in Thailand two years in a row.
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Mistake #5 Forecasting drastic changes in cash conversion cycle
In this video, I am talking about most common valuation mistake #5 forecasting drastic changes in the cash conversion cycle and how to avoid it, based on the results of 17,414 companies across the world and across time since 1995.
The keynotes are:
• What is a working capital, and the terms, including current assets, current liabilities, working capital, gross working capital, net working capital, operating working capital, working capital investment, and operating cash flow?
• Why the right level of the current assets is ZERO?
• Three main components of the current assets: cash, accounts receivable and inventory.
• Three types of liabilities: short-term borrowings, long-term debt and the third one, including deferred revenues; customer advances; accrued compensation; accrued taxes; declared but unpaid dividends.
• Based on the results of more than 17 thousands companies around the world since 1995 the inventory conversion is 56 days, the receivable collection is 59 days and the cash conversion cycle is about 77 days, on average.
How to avoid the common mistakes?
Huge year-to-year changes only happen in exceptional cases. Significant changes in product mix or the introduction of new products can occasionally cause such huge annual changes. But, generally, annual forecasts should not deviate substantially from the historical numbers.
What you will learn from this video:
• Avoid huge changes in working capital items, except in rare cases where there are changes in product mix or management policy
• The forecast should not deviate substantially from the historical numbers without an explanation
Want to know more about common valuation mistakes. Follow the links below:
# 1 Overly-optimistic revenue forecasts
https://youtu.be/9jkfAPcDomY# 2 Underestimating expenses causing unrealistic profit
https://youtu.be/fP27UEbPYi8# 3 Growing fixed assets slower than revenue
https://youtu.be/3dSsE13DhJ4# 4 Confusing growth with maintenance Capex
https://youtu.be/QH4QJQedupE# 5 Forecasting drastic changes in cash conversion cycle
https://youtu.be/fBcuoCPN43kFind me here:
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