The Daily Technical #124: In private equity, what is a capital call?

Good morning. Welcome to the 124th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What is working capital?

The working capital metric measures a company's liquidity and ability to pay off its current obligations using its current assets.

In general, the more current assets a company has relative to its current liabilities, the lower its liquidity risk.

Current liabilities represent payments that a company needs to make within the year (e.g., accounts payable, accrued expenses), whereas current assets are resources that can be turned into cash within the year (e.g., accounts receivable, inventory).

Working Capital = Current Assets − Current Liabilities

Common Mistakes

1. Failing to grasp why working capital matters for liquidity risk. Recognize that a higher ratio of current assets to liabilities indicates lower risk; it reflects financial health and operational efficiency.

2. Mixing up current assets and total assets. Remember that current assets include resources convertible to cash within a year, such as accounts receivable and inventory, not equipment or intellectual property.

3. Mistaking long-term debts for current liabilities. Focus on obligations due within the year, like accounts payable or accrued expenses, to accurately assess short-term financial responsibilities.

TL;DR

• Define working capital: liquidity measure showing ability to pay short-term obligations.

• Identify current assets: cash-convertibles within a year (e.g., accounts receivable, inventory).

• Recognize current liabilities: due within a year (e.g., accounts payable, accrued expenses).

• Calculate using the formula:

  Working Capital = Current Assets − Current Liabilities

• Emphasize ratio importance: more assets than liabilities reduces liquidity risk.

TODAY’S QUESTION
In private equity, what is a capital call?

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