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The Positives of Negative Working Capital

Wireless communications and broadcasting firms have a knack for taking in other people's cash quicker than theirs goes out.
Kathleen Hoffelder, CFO.com | US
June 8, 2012

While most corporations have figured out how to start a business with other people's money, some wireless communications and broadcasting companies have figured out how to actually run a business on other people's money.

How do they do it? By collecting as much money as possible in advance from customers and holding out on paying others, says Chuck Mulford, an accounting professor at Georgia Tech University and director of the Georgia Tech Financial Analysis Lab.

"They are better than average at minimizing how much they carry in accounts receivable. They are sticklers about getting paid as quickly as possible and they are taking a little longer than the average company in paying their vendors," he says.

In Mulford's latest analysis of 135 companies in the communications sector (ranging from digital companies to broadcasting, cable, telephone, and wireless firms), he notes that wireless and broadcasting firms stood out among the rest of the industry in 2011 for being the best at taking in other people's cash more quickly than theirs goes out. "Where they really generate cash is in their careful management of operating working capital," he says.

In accounting terms, these companies, more specifically, have negative operating working capital, or negative capital after subtracting their current liabilities from their current accounts receivables and inventory. Working capital without the "operating" component typically includes securities that a company holds as part of its assets, which is why operating working capital gives a clearer picture of how a company actually functions.

Ordinarily, having negative anything is not a good thing, but with operating working capital it can be. Mulford says companies with negative operating working capital (expressed as a percentage of revenue) tend to be more adept at raising cash than companies with positive operating working capital. If a company has positive working capital, his thinking goes, it tends to use a portion of its growth and revenue to pay for the increase it will have in inventories and receivables. "But a company with a negative operating working capital can effectively 'borrow' from its vendors or customers as they grow, since it is being financed with customer funds," says Mulford.

DigitalGlobe is one such example. The high-resolution satellite-imagery company had one of the most negative operating working capital scores for 2011 at -92.98%, according to data provided to Mulford by Cash Flow Analytics LLC.

"The primary driver behind the company's very negative working capital score is its deferred revenue," Mulford says. "DigitalGlobe gets paid in advance for the products and services it provides." Competitor GeoEye had an operating working capital of -50.24%, and third-place fiber-optic network concern AboveNet had an operating working capital of -29.99%.

Of course, having an all-cash business, with no operating working capital, is also good, Mulford notes. But having negative operating working capital is a prerequisite to having an exceptional free cash profile (FCP), a measureof the ability of a company to generate free cash flow as its revenue grows.

DigitalGlobe, for example, had an FCP of 74.45%, the highest out of a target group of middle-market companies (those with revenues ranging from $300 million to $800 million) in the communications industry. Wireless communications operator SBA Communications also turned in a high FCP, hitting 66.71%. SBA also had low operating working capital of -20.15%.

Larger companies in the study had similar results. SiriusXM Radio had an FCP of 105.80% in Mulford's study, which coincided with an operating working capital of -77.84%.

On average, the communications sector ranked high in FCP, at 17.49%, compared with 3.73% for all other nonfinancial companies.

Communication industry breakdown by Cash Flow Analytics' Chuck Mulford


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