Which of the following are most likely to be correctly estimated when using nominal forcasts of firm performance?
a) Return on invested capital
b) Net working capital to revenues
c) Net PPE to revenues
Answer has B but doesn’t really explain why. Can anyone explain the process of how to figure this out?
Emerging Market section can be tricky. Without looking anything up:
WCinv and Revenues are both monetary items and affected by inflation. The other two formulas involve a monetary item and non-monetary (PPE & Capital).Non-monetary items are on the BS at bookvalue.
So we only inflation adjust monetary items? Cash/Inventory/Receivable/Payable/Rev?
And when we adj for inflation say WCinv, the adjusted valued should be lower than unadjusted value?
PPE and Equity (as part of invested capital) are both “stale” on the balance sheet since they are reported at historical cost. So that eliminates A and C.
B has items that will be inflated with inflation…
That’s how I see it…
I don’t think of Equity as “stale”. NI flows through to it. As for WCinv, yes deflate nominal values by inflation index.
You’re right, but it is partially stale and not fully inflated…
Working Capital is Current Asset- Cash - Current Liability.
Most of the inventory, short term debts, payables, receiveable all get turn over pretty qucikly. When have you seen a sales to turnover, receivabale turnover, payabale turnover less than 1 (in the questions and in real life). That means by the end of the period, the NWC should of caught up to the inflation.
It takes years for equity and PPE to change