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Analysis of the Weighted Average Cost of Working Capital of Selected Companies on the Bulgarian Stock Exchange During the Financial and Economic Crisis

Author

Listed:
  • Evgeni Raykov

    (University of National and World Economy, Sofia, Bulgaria)

Abstract

The conception of weighted average cost of working capital (WACWC) is based on a long-term approach to short-term assets. The importance of this relatively new indicator reveals the efficiency of liabilities management in crisis and provides a good basis for decisions concerning operating profitability and turnover. The WACWC can also represent the compensation effects of the capital structure dynamics and interest rates influence in times of shortage of capital sources. This new index measures the internal ability of implicit financing sources and the risk of financing current business activities. It also covers some non-traditional capital options that ensued from the crisis like related parties’ financing and sales or depreciation funding, extended trade credit schemes, renewable overdrafts and credit lines, etc. Analyzing data for selected Bulgarian companies during the crisis and post-crisis period (2007-2015) shows a constantly decreasing average cost of working capital financing. This resulted from a changing capital structure that is characterized by an increasing share of equity in the form of retained earnings and debts to related parties. The short-term effect of all other sources of financing continues till the WACWC is in balance with the regulated trading rate of return after normalization of the conditions for overdraft and owner’s capital financing. WACWC shows very close values to classic long-term WACC which is compensated by poor results for the profitability on current assets (ROCA). The higher liquidity requirements led to a reasonable increase in current assets investments although their share to the net revenues remains relatively constant. The enhanced role of owner’s capital has become a natural reaction to the external shocks caused by the crisis but also a remedy assuring flexibility, independent asset management and risk selection for implementing effective hedging policy in the corporation.

Suggested Citation

  • Evgeni Raykov, 2017. "Analysis of the Weighted Average Cost of Working Capital of Selected Companies on the Bulgarian Stock Exchange During the Financial and Economic Crisis," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 4, pages 555-572, December.
    • Handle: RePEc:nwe:eajour:y:2017:i:4:p:555-572
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    References listed on IDEAS

    as
    1. Iustina Alina BOITAN, 2016. "Crowdlending and Financial Inclusion Evidence from EU Countries," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 4, pages 418-432, December.
    2. Monika Bolek, 2014. "Return On Current Assets, Working Capital And Required Rate Of Return On Equity," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 10(2), pages 1-10, August.
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    More about this item

    Keywords

    financial and economic crisis; weighted average cost of working capital; working capital management;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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