Analyzing Reddit's Non-Cash Working Capital.

 Reddit's  Change In  Non-Cash Working Capital.

Introduction:

Will be discussing:

Considering Reddit’s position within its corporate life cycle and the dynamics of the industry it operates in, how should one interpret the net change in its working capital for the fiscal year 2024? 

Will Go Over The The discrepancy between the increase in non-cash working capital (NCWC) and the negative change in working capital on Reddit's cash flow statement


Let's Break It Down!


What Is Non-Cash Working Capital:

For the purpose of our analysis, non-cash working capital (NCWC) is considered as the net difference between operating current assets and operating current liabilities. In determining this figure, we deliberately exclude cash, short-term investments, and any interest-bearing debt or financing-related items. This approach ensures that the measure reflects only the operational elements of the balance sheet.

 NCWC = ( Current Assets - Cash & Equivalents  ) - ( Current Liablities - Interest bearing debt ),

or NCWC = ( Operating Current Assets ) - ( Operating Current Liabilities )

For operating assets, we consider items such as trade and other receivables (and any other non-cash current assets). For operating liabilities, we typically add up payables, accrued expenses, employee-related provisions, and deferred revenue.

Link For Ref

Reddit's change in working capital was -67.47 on their cash flow statement for FY24 and -29.99 for FY23. What does that mean? 

Reddit's change in working capital was -67.47 Million in FY24 and -29.99million in FY23. This shows that working capital went down in both years. When working capital decreases, it usually means the company is unlocking cash that was previously tied up in things like inventory or receivables. This might happen if Reddit collected payments faster, or delayed paying suppliers. That freed-up cash helps boost free cash flow, giving the company more money to run the business, invest in growth, or return value to shareholders. On the other hand, if working capital had increased, it would’ve tied up more cash in day-to-day operations, potentially limiting how much the company could spend elsewhere. 

Let's go a Bit deeper now, Also NOTE: All Numbers Are In Millions.

First & Foremost, Reddit's reported Change in working capital for FY24 was "-67.47", however Reddit's Change In Non-Cash Working Capital is "76.20" 

The difference between the rise in non-cash working capital and the negative change shown on Reddit’s cash flow statement comes down to how shifts in working capital affect cash flow. It’s all about timing, when current assets and liabilities go up or down, they can either use up cash or free it up, which explains the mismatch 

What "Change in Working Capital" Means:

On the cash flow statement, the change in working capital shows how much cash was either used up or made available due to shifts in a company’s short-term assets and liabilities. It basically captures how changes in things like inventory, receivables, and payables impact cash flow.

If the number is negative, it means the company needed more cash to run its operations, maybe because it built up inventory ( not for Reddit ), took longer to collect payments, or paid off some bills. As a result, less cash is available for other things, which puts a dent in free cash flow. 

Non-Cash Working Capital (NCWC):

NCWC looks at a company’s working capital but leaves out cash and short-term debt. It zeroes in on the day-to-day parts of the business, like inventory, receivables, and payables.

When NCWC goes up, it usually means the company is putting more money into things like inventory or accounts receivable compared to what it owes in the short term (excluding debt). This could be a sign that the business is growing or investing more in its operations. 

Why the Discrepancy?

The negative change in working capital or NCW on the cash flow statement includes cash and cash equivalents, while NCWC leaves those out. So, if Reddit’s cash balance went up a lot, it wouldn’t show up in NCWC, but it would still affect the overall working capital number and contribute to the change seen on the cash flow statement. 

The rise in NCWC shows that the company is putting more money into running its business, like building up inventory or giving customers more time to pay. But at the same time, the negative change in overall working capital means that, when you factor in cash and short-term debt, the company ended up using more cash to support its operations.


Growth Signal:

The rise in NCWC shows that Reddit's revenues  are going up, leading to more receivables, or they’re stocking up on inventory. That’s generally a good sign of growth, but it also means the company needs to manage its cash carefully so that this growth doesn’t end up putting too much pressure on its finances.

Some more Postivites:

Reddit's annalized revenue growth from FY2020 to FY24 was 54%, whereas, Accounts Receiavbles annaluzed over that same period was 41%. When a company grows, it usually sees a boost in sales and revenue. To support that growth, it often gives more credit to new customers or raises limits for existing ones, which leads to a jump in accounts receivable. In Reddit’s case, expanding into new markets or launching new services could be driving both higher revenue and a rise in receivables. 

It's also common for businesses that earn revenue from advertising to have higher receivables, since payments aren't received upfront for ads that have already been displayed.

Sales Strategy: Sometimes, companies push for growth by offering more attractive payment terms or special deals to bring in customers. This can lead to more sales made on credit, good for boosting revenue, but it also means accounts receivable will go up. Reddit is trying to attract new users or advertisers by being flexible with payment options, it makes sense that both revenue and receivables would rise together.

Industry Dynamics: In some industries, it’s normal for a large part of a company’s revenue to be tied up in accounts receivable because of how the business works. Take tech or digital advertising, for example, companies often bill clients after the service is delivered, which creates a delay between recording the revenue and actually getting paid. So as Reddit’s revenue grows in this kind of industry, it’s no surprise that accounts receivable would grow too.

Overall Growing Customer Base:
As a company brings in more customers, it naturally sees more transactions, which often leads to a rise in accounts receivable. So, if Reddit is doing a good job attracting new users or advertisers, it would make sense to see both revenue and receivables go up as a result.


Reddit's deferred liability increased from $2.26 million in 2020 to $14.81 million in 2024. What implication does this have for the company's overall working capital and financial health.

Understanding Deferred Liability:

Deferred liability, often referred to as deferred revenue, represents cash received from customers for goods or services that have not yet been delivered. It is classified as a current liability on the balance sheet because it is expected to be settled within one year. 

Impact on Working Capital:
Working capital is the difference between a company’s current assets and current liabilities. So, when a deferred liability goes up, it being a current liability, it brings down the overall working capital. That’s because it reflects something the company will need to fulfill soon. Overall, this is a positive sign, it means the company has received cash in advance for services it has yet to deliver.


 




 





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