The Daily Technical #15: Why would a company issue equity vs. debt (and vice versa)?

Good morning. Welcome to the 15th 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
Is negative working capital a bad signal about a company's health?

The answer to whether negative working capital is a bad signal depends on the specific circumstances of the company.

Negative working capital occurs when current liabilities exceed current assets, but this doesn't always mean the company is in trouble.

In certain cases, negative working capital can actually be a sign of strong operational efficiency.

For example, companies with rapid inventory turnover, fast cash collection cycles, and strategic payment delays to suppliers can maintain a healthy negative working capital position. This indicates that they are using their cash effectively, reinvesting excess into higher-yield opportunities, all while managing obligations without liquidity issues.

However, it can also be a red flag for companies with poor cash management.

If a business has a large accounts payable balance due soon, low inventory levels, and low accounts receivable, it may face a liquidity crisis. In such cases, the company would need to seek external financing or risk default.

Common Mistakes

1. Many mistakenly think negative working capital always indicates poor financial health, without considering the company’s industry and business model.

2. Forgetting to evaluate the company’s cash flow, inventory management, and receivables before jumping to conclusions.

3. Not realizing that in some industries, like retail or fast-moving consumer goods (FMCG), operating with negative working capital is a strategic advantage.

Key Takeaways / TLDR

• Negative working capital can be either good or bad, depending on the company’s cash flow and operational efficiency.

• Positive indicators include quick inventory turnover, rapid revenue collection, and efficient use of cash.

• Red flags include poor cash management, high accounts payable, and low inventory or receivables.

TODAY’S QUESTION
Why would a company issue equity vs. debt (and vice versa)?

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