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No. of Recommendations: 8
(From an HG board. -HH)


In its latest fiscal year, Dell (DELL) made a negative investment in working capital (WC), to the tune of $(355).

A negative investment in WC, as you know, means working capital assets like receivables and inventory grew slower than working capital liabilities like payables and accrued expenses.

In human terms, a negative investment in WC is like getting paid today for work (pick your profession: the house you will paint, the blueprints you will finish, the patients you will see) two weeks hence. Now that is a great job! Most of us have to labor first and then wait for a paycheck.

So when a company like Dell or a Blue Nile (NILE) has a negative investment in WC, the company is able to finance its growth, or at least part of its growth, via capital providers who do not seek either an interest payment or an imputed rate of return (part of which may include a dividend.) Free financing, in short. Always a plus.

To estimate how much cash Dell needs to run its business, I added its COGS, SG&A, R&D, taxes, investment in WC, and investment in fixed capital and for the FYE Mar. 31, 2006. The total: $52.6 billion.

Meanwhile, Dell had $9.1 billion of cash and short-term investments at the end of its latest fiscal.

So depending upon how many months worth of expenses (costs + investment) you seek, surplus cash is:


1 month $4.7
2 months $0.3
3 months $(4.1)

My basis for this estimation process is that it is similar to way many families run their household budget. They figure out how what their monthly expenses and then multiply that amount by the number of months they want to cover, should someone lose a job, etc. The more months of expenses that the savings account can cover, the bigger the margin of safety in case of what Ben Graham called "miscalculation or bad luck." By expensing investment in WC, I think we accomplish the same thing as your DSO idea. In Dell's case, because WC is a source of cash, expenses + investment is somewhat less than at other companies where WC is a use of cash.

Last item...has anyone noticed the sharp drop in Dell's negative investment in WC? In absolute dollars, its $355 source of cash is at its lowest point since 1998--and 1998 sales were 22% of last year's sales. Given that Dell's sales are 4.5 times larger than 1998, Dell's negative investment in WC should be, at least theoretically, much larger. Perhaps this helps explain why Dell's stock price is falling faster than the Atlanta Braves.

Here are Dell's negative investment in working capital as a percentage of revenue for fiscal 1998-2006. I am also including its negative investment (remember: this is a source of cash) in WC in absolute dollars.

2006 0.6% $355
2005 4.5% $2,208
2004 2.8% $1,145
2003 4.0% $1,422
2002 2.8% $888
2001 3.0% $942
2000 3.5% $894
1999 2.3% $418
1998 3.2% $393


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