If you get the opportunity can you please share your...

If you get the opportunity can you please share your understanding of ‘working capital’ in the case of DTL. It’s quite interesting how cash and other elements of WC expand and contract on a six monthly basis. How will this affect Net Profit and cash flows in the second half of ‘24. Does this present any opportunities or danger for your basic Mom and Pop investor, perhaps without the deep accounting knowledge necessary to interpret these accounts correctly?
Here’s a chart of WC history from this week’s briefing…

@Prisoner24601,

At the outset, I think that chart does more to confuse than it does to make things clearer, for two reasons:

1.) It includes things that are insignificant in the scheme of things (eg, Inventory, Other Current Assets and Other Liabilities.) Exclude those, and the chart is little changed.

2.) It includes Cash as a working capital item, which I think is flawed when it comes to discussing and analysing the ebbs and flows of the company's working capital. Because the resulting Cash position is a result of working capital movements, as opposed to being an element of it.

So, for our purposes as investors, I think this is a more relevant graphic representation of the working capital question:



As can be seen, it is a graph of just Receivables (blue bars) and Payables (orange bars), with the dotted line representing Net Working Capital at period-end (read of the RH-Axis).

As can also be seen, in the last year the company had run up a massive Receivables balance at the end of FY2023 (to almost $800m, compared to around $240m at 31 Dec 2022), only partly offset by the $200m-odd increase in Receivables over the period.



As can be seen from the graph above, the negative $300m working capital balance @ 30 June 2023 was unusually large.

The result was the big jump in the cash balance to over $400m @ 30 June 2023 (denoted by the blue column in the graph below), an increase of $350m over the 6 month period:



But then sometime early in FY2024 the company would have conducted a large payment run in favour of its suppliers, thereby running down the Payables and the Cash balance, which ended at $117m @ 31 December 2023.

The cash balance over the DH2023 period - on which the record, $6.5m of interest income would have been earned - would have been somewhere between $405m and $117m. Time-weighted, it would have been below the average of the two balances, probably closer to $230m.

Being a long-term shareholder who is interested in rising intrinsic value over time, I normally I don't concern myself with what happens to a single line item in just one of the financial statements in a certain half-year but the charts above segue into answering your question about implications for the interest income item for the current half.

In the absence of knowing otherwise, I believe expecting some reversion to the mean is appropriate, meaning that the year-end cash balance will certainly be a lot less than $400m, perhaps $200m? Which means the average cash held over the current half will be around $140m, and the resulting Interest Income would be around $3m. Is my best guess (and not an overly scientific one, at that).

Whether or not that represents an opportunity or a danger to basic Mom and Pop investors, I'm afraid have no idea, because that's really not the game I know how to play.

Apologies for not being more helpful, but my game is to go to where I think the company's earnings will be in 3 to 5 years, and to wait there for those earnings. In which case, what the interest income line will be in any given 6 month period is largely irrelevant.

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