How do you think about working capital build ups in detail? Would it be alright, if the build up didn't consume the entire free cashflow?
Once working capital normalizes a bunch of companies will get +10% of their enterprise value as cash inflow. A recession might even increase the cash inflow while share prices should fall. This could be a big value driver with the right capital allocation policy.
I'm starting to actively look for such companies now. I guess chemical companies like Fuchs Petrolub and distribution companies like Ferguson fit description.
I think that working capital buildup will go in line with revenue growth generally, in particular in the sectors you mention. Also, I agree that cash generation for these businesses will be countercyclical to the general economic situation as less sales happen, less accounts recevables remain outstanding and inventories are reduced.
On a more downbeat note, there may be a lasting effect of the supply chain disruptions some companies have come to experience recently. This experience may result in companies storing more inventories (and tying up more capital) permanently as the supply situation does not appear as secure as before. Anecdotally,I feel this effect exists, but find it hard to quantify.
Good performance and great overview. Many thanks!
How do you think about working capital build ups in detail? Would it be alright, if the build up didn't consume the entire free cashflow?
Once working capital normalizes a bunch of companies will get +10% of their enterprise value as cash inflow. A recession might even increase the cash inflow while share prices should fall. This could be a big value driver with the right capital allocation policy.
I'm starting to actively look for such companies now. I guess chemical companies like Fuchs Petrolub and distribution companies like Ferguson fit description.
Thanks for your comment.
I think that working capital buildup will go in line with revenue growth generally, in particular in the sectors you mention. Also, I agree that cash generation for these businesses will be countercyclical to the general economic situation as less sales happen, less accounts recevables remain outstanding and inventories are reduced.
On a more downbeat note, there may be a lasting effect of the supply chain disruptions some companies have come to experience recently. This experience may result in companies storing more inventories (and tying up more capital) permanently as the supply situation does not appear as secure as before. Anecdotally,I feel this effect exists, but find it hard to quantify.