yesterday’s post on portfolio construction heuristics generated a much more interesting discussion here than on twitter, just as expected!

today I’m reposting a much longer one (25 mins, per medium) that again got little to no meaningful engagement on twitter - this time about accounting, essentially.

if you are a professional accountant, have any experience in tradfi, or in a finance department in a role that requires interpreting accounts, please please please do me a favour and take the time to read this and give me some feedback!

TLDR: working capital is really not well understood or *accounted for* (lololololol) in traditional financial and accounts analysis, and I have come up with 2 ways of treating this mathematically that tease out how to think about it more sensibly:

i) adjust DuPont to better reflect the differences between net working capital and fixed assets and between cash flow from operations and working capital adjustments. once you read it and grasp what these adjustments achieve, you will appreciate what I am getting at here is something like “true capital employed” and “true cash profit”.

ii) extend the concept of “cash conversion cycle” from working capital to *all capital employed* so as to be able to directly mathematically interpret the effect the working capital position is having on returns.

enjoy!