Why does Warren Buffett rely heavily on Net Working Capital analysis Essay - 2

Why does warren countert rely heavily on Net Working jacket analysis as his principal order of valuing businesses Do you agree - Essay ExampleWhen current assets are twice the size of current liabilities, pull in working capital is enough for most businesses to avoid its problems. If the value of current assets is less than one and a half size of current liabilities, then the business would be short of working capital that leave alone result in the difficulty to meet its immediate debts. Businesses having difficulty in controlling their silver move and working capital are said to have liquidity problems. Liquid assets are those assets that can be easily changed in to property such as stock, debtors and short term investments.Buffett looks and analyses a business in general with owner earnings and return on equity measures both in turn give an general picture of cash flow available in a business and its operational efficiency. According to Buffets analysis method, it is ver y obvious that increased working capital can be viewed as cash out flow because money that are owed by debtors to the business or occupied in stocks cannot be utilized for meeting any other payments and thus no returns can be expected. Here, crimson though the working capital shows increases, the business can be viewed as inefficient as it failed to cop debtors on time.From assessing a business through mere working capital analysis, Buffett finds an advanced method of analyzing admit net working capital or cash flow available to the shareholders through owner earning analysis.Capital expenditure, that is the money needed to spend on purchasing or upgrading plant or equipments, is deducted from net income and hence it forms as an Economic Value Added (EVA) analysis. By adding depreciation and amortization back also it gives an accurate cash flow available to shareholders. This analysis method looks at the ability of a firm to generate cash for its residual owners. Even though, th e decisive