What exactly is revenue?

Discounted Cash Flow: In DCF valuation of a company, what are the methods to forecast Working Capital, other than taking the historical Working Capital as a percentage of Revenue? [I need help with my DCF model]

• I'm trying to use the Discounted Cashflow Model to estimate the fair value of Gameloft, a French company that develops games for feature phones and smartphones. After forecasting the Net Operating Profit After Tax (NOPAT) for the next five years, I must adjust NOPAT for non-cash items (Depreciation & Amortization, Capital Expenditures, Working Capital Variations). I understand that one easy way to calculate those items is taking the history of the last 3-5 years and see how much was D&A, CAPEX and WC as a percentage of revenue. Then, compute the annual variations of WC and add or substract from NOPAT. Mi problem arises from the fact that in the past 5 years, WK as a percentage of revenue has oscillated between 20% and 22%. I could simply use that figure in my forecast, and assume that in the next five years, WK will be 20-22% of revenue. However, I also forecast a very high growth in revenue during that forecast period, which makes WC jump in the same magnitude (between 30% and 80% YoY). The problem is that in some of the forecast years, such a large WK Variation makes my FCFF forecast decline instead of grow, which doesn't make sense since I expect the company to perform very well in those years, in terms of income growth. I put together a short version of my calculations here, in case I'm not being clear in my explanation. https://docs.google.com/spreadsheet/ccc?key=0Annk9_ybZistdHZueFdEbGxzOXFLdFRiT19uY2dsRmc So my questions are: should I be using a different method to forecast WK variations? Should WK variation fall to zero as it approaches a stability period (that would be 2019+ in my model)? I've also been thinking about this: let's assume that in 2018 Gameloft is forced to pay to its suppliers only in cash (so that its trade payables fall to zero) and that the company gives its clients only 30-days payment credit (one month). Would it be realistic to say that, in such a scenario, Gameloft's WC could be 1/12th of its revenue, at maximum? (1/12th because by 12/31/20XX, trade receivables could only amount to the sales carried out during December). If this were a possibility, then I could try restricting WC with this assumption.

• Answer:

  Forecasting out Net Working Capital is an essential part of finding a firm's free cash flows. Often, investors will only forecast NWC year over year using the total amount as a % of revenue. A more detailed way to do this would be to project out all the firm's working capital items individually using the appropriate drivers. Items such as Accounts Payable, Accounts Receivable, and Inventory can be driven using payable days, receivable days, or inventory days respectively. A modeler can find out what the appropriate days have been historically for each of these lines items and then use an average or characteristic figure to project future inventory, payables, and receivables. Other working capital items can be taken as a % of revenue (since most of these items will be largely driven by revenue). The summation of these individually projected line items should give you your working capital balance each year. Many respected funds do teach analysts to project working capital in aggregate as a % of revenue, since payables, receivables, and inventory are often driven by sales. Modelers just need to be aware of what changes in working capital actually mean about the firm (increases in net working capital year over year mean NWC is a use of cash, while negative changes indicate a source of cash).