What is the difference between working capital and operating capital?
… and the second question:
For software companies P/BV is a good multiple whereas for firms from service industries is not.
Reasoning: software firms have less fixed assets and service firms have a big amount of intangible assets.
Is it correct?
No it is the opposite, P/Bv is not a good multiple for service companies where you have less liquid assets and less multiple assets
Thanks Ahmed, but I am still confused As per my notes P/BV is good for software makers but not very meaningful for firms in service industries. Service industries usually have not a significant amount of fixed assed, the same as financial ones (banking, insurance etc) so P/BV works for them. On the other hand, the firm as, software makers, have much more intangible assets as human skills so P/BV doesn’t seem to be a good multiple. Could someone review as well and advise on the correct reasoning?
According to CFAI in one of the drawbacks of using P/BV they mentioned that in many service companies (Human Capital: the value of skills and knowledge possessed by workforce) is more important than physical capital and this human capital will not be reflected in the book value
so using BV to assess these companies’ value will not meaningful and it goes for software makers as well it is a company that depends on the knowledge skills, but lacks physical or liquid assets
i hope this explains it