The Daily Technical #38: Among the DCF, comparable companies analysis, and transaction comps, which approach yields the highest valuation?

Good morning. Welcome to the 38th 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
Why are cash and debt excluded in the calculation of net working capital (NWC)?

Cash and other short-term investments (e.g., treasury bills, marketable securities, commercial paper) and any interest-bearing debt (e.g., loans, revolver, bonds) are excluded when calculating working capital because they're non-operational and don't directly generate revenue.

Net Working Capital (NWC) = Operating Current Assets − Operating Current Liabilities

Cash & cash equivalents are closer to investing activities since the company can earn a slight return (~0.25% to 1.5%) through interest income, whereas debt is classified as financing. Neither is operations-related, and both are thereby excluded in the calculation of NWC.

Common Mistakes

1. Mixing Up Concepts. NWC pertains strictly to operations, not financial or investing activities. Keep definitions and their applications sharp and accurate.

Key Takeaways / TLDR

• NWC includes only operational assets and liabilities

• Cash and debt are out—they’re non operational and don’t directly generate revenue

• Cash is closer to an investing activity and debt is classified as financing

TODAY’S QUESTION
Among the DCF, comparable companies analysis, and transaction comps, which approach yields the highest valuation?

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THAT’S A WRAP
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See you Monday,

The HirePrep Team