Lesson 5 of 6 · 15 min
Working capital, capital investments and capital structure
Working capital comes from efficiency ratios applied to the revenue and cost forecasts; fixed assets from maintenance and growth capex less depreciation; and debt from a leverage ratio such as debt to EBITDA applied to forecast EBITDA.
In short
- Working capital: forecast DSO, DOH and DPO (efficiency ratios), then combine them with the revenue and COGS forecasts to get receivables, inventory and payables.
- Do not simply grow every working capital account at the sales growth rate: each item has its own driver.
- Maintenance capex sustains the existing business and is often based on D&A, adjusted slightly upward for inflation in capital goods; growth capex is discretionary and tied to expansion plans and revenue growth.
- Net PP&E rolls forward: beginning + capex − depreciation. Useful life ≈ gross fixed assets ÷ D&A.
- Capital structure: use leverage ratios (debt/capital, debt/equity, debt/EBITDA) as the forecast object, guided by history, financial strategy, guidance and the capex plan.
Unlock this lesson free for 7 days
Create a free account to get 7 days of full access — every lesson, video, flashcard, mock and the question bank. No card needed.