When analysing receivables and payables the focus of investors tends to be on their cash flow and liquidity effects. However, these balances also impact financial leverage and equity risk, which may affect the comparability of valuation metrics. Factoring and other working capital financing contributes to the problem, but all companies are potentially affected.
We explain the leverage effects of receivables and payables, and use two European Auto Parts companies to demonstrate how equity valuation metrics can be adjusted to provide additional analytical insights. We also consider how the accounting for working capital balances and financing arrangements complicates the analysis.
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