Why does Warren Buffett rely heavily on Net Working Capital analysis Essay

Why does Warren Buffett rely heavily on Net on the job(p) Capital analysis as his principal method of valuing businesses Do you agree - Essay ExampleWhat is meant by Net on the job(p) Capital? Net Working Capital (NWC) is online Assets minus Current Liabilities. Current Assets include Cash and Cash Equivalents, Receivables, Inventory and other current Assets. Current Liabilities include all shortly Term Borrowings. Net working Capital is also defined as that part of Current Assets that is financed by Long term Funds. This definition of the NWC is useful for the analysis of the trade-off between Profitability and risk. The Greater the hail of NWC, the greater is the liquidity of the business, lesser the risk. Thus, if the companys goal is increasing profitability, it can be achieved by increasing risk, which again is measured by the lower level of Net Working Capital. The important elements of determination making during the process of purchase of a business argon Profitability and Risk. Both these elements can be analyzed using Net Working Capital. Net Working Capital can be modify by infusing new funds in to the business in terms of Capital or huge term finance. Similarly, NWC can be deteriorated by purchase of Long Term Assets. Any increase in Current Assets of the company which has a corresponding increase in current liabilities would not effect the NWC of the company.The regard as of the business is determined by its intrinsic comfort. Intrinsic value of a business can be determined by Long term Assets minus Long term Liabilities. The other way of amount the intrinsic value of the business is Current Assets minus Current Liabilities, which is measured by Net Working Capital.2In a net-net situation, an investor estimates a liquidation value for a company, then tries to pay a fraction of that value in the market. Ben Graham loved these types of situations, defining the net-net value asGraham would invest in companies which are available at a price which is two-thirds of the NWC of the company, the one-third portion is the margin of safety which would protect the investor against