Working capital in DCF valuation
Could you please share with your ideas what is the best way to project future changes in Net Working Capital when using DCF valuation?
I stopped on three ways to do it and would be good to have some discussions about it:
1. One is to use the change in non-cash working capital from the year and to grow that change at the same rate as earnings are expected to grow in the future.
2. The second is to base changes on non-cash working capital as a percent of revenues in the most recent year and expected revenue growth in future years.
3. The third is to base our changes on the marginal non-cash working capital as a percent of revenues in the most recent year, computed by dividing the change in non-cash working capital in the most recent year into the change in revenues in the most recent year, and expected revenue growth in future years.
Or may be you know muh easy and exact ways to project growth of working capital need in DCF valuation. Would appreciate your ideas.
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