Investigating the working capital record of the company and its clientele is a must for investors. The danger signs to look for are huge and growing outflows of working capital, especially when the company fails to generate any cash at all from operating profits. If the working capital movements cast doubt over trading, then no method of valuation would make the company a tempting investment. Depreciation and capital expenditure Depreciation represents the net cost of purchasing an asset. The charge also effectively represents a proportion of the asset replacement cost.
Depreciation is calculated on the historical cost of an asset.
That's beyond the scope of this article, but suffice to say, some sort of adjustment should be considered. Of course, it pays to be invested in companies that have low fixed asset requirements in the first place. These operations tend to have the greatest return on equity, the key indicator for shareholder profitability. If you're involved in asset-light companies like MMT, then few depreciation adjustments have to be performed. The difference between depreciation and actual cash capital expenditure, when compared to overall profits, is neglible.