Nordea’s Working Capital Report analysed the performance data of 9300 companies from publicly available financial reports between 2013 to 2017. The report found that overall the working capital level remained fairly stable during the four years. However, large deviations were uncovered below the surface.
Nordea’s Working Capital Management team frequently undertake studies of the state of working capital, approaching the subject from a fresh angle each time. You can download the latest Working Capital Report here.
Patrik Zekkar, Global Head of Trade & Working Capital Management at Nordea, says: “Working capital has always been a key focus area for us, with its direct impact on performance and its potential for unlocking opportunities for growth. It goes without saying that regardless of similarities in industry or size, every company operates with its own unique situation and position in the market. As operating models and business approaches are individual for each company, there is clearly no ‘one size fits all’ solution for optimising working capital. Our latest Working Capital Report takes these differences into account by studying a range of indicators that show the development of working capital over a four year period. We hope that by casting the net wide in our analysis, customers will be able to gain insights on aspects of working capital that are relevant to them.”
The data confirmed a clear link between size and working capital, with the larger the company, the smaller the ratio of working capital and the smaller the company, the larger the ratio of working capital. Also, companies improved on average Days Payables Outstanding (DPO) to a higher extent than Days Sales Outstanding (DSO) over the four years. This conclusion holds true, if we look at data by industry, size or region. The findings suggest that it is easier for a company to make demands on a customer rather than a supplier. Return on Capital Employed (ROCE) increased in 2017 for all companies with a market capitalisation greater than 100 EURm, while the smallest companies saw ROCE decline. So once again size was a determining factor.
The data also showed that over four years, companies that improved the ratio of Net Working Capital (NWC) to Sales have been able to do so whilst also improving margins. When optimising working capital, there can often be a trade-off between margins and turnover on net working capital. For example, when a company demands longer payment terms from its supplier, the supplier might accept the new terms but increase the price as a compensation, leading to lower margins for the company. However, this does not appear to have been the case.
An opposite trend can be seen for companies with worsening rations of NWC/Sales. On average, those companies haven’t been able to compensate for higher working capital through better margins. This group has on average not been able to compensate for the extra liquidity being tied up in working capital through higher profits but have in fact seen their EBIT margins deteriorate.
As the group of companies who improved NWC/Sales released cash from both margins and less working capital, this lead to a gap in cash conversion ratios compared to those who failed to do so. Companies that have improved working capital have spent the increased cash flow on paying dividends and bringing down debt. They have invested marginally more and grown a bit more in recent years in comparison to peers not improving net working capital.
Looking across regions, working capital levels were found to be generally higher in Asia, which thereby in effect has been financing international trade. Asian companies were shown to have generally longer payment terms than most western countries, with the exception of China. Across industries, there was a wide deviation in the ratio of NWC/Sales with only a few industries improving working capital over the four-year period covered by the data.
Maiken Lausen, from WCM Advisory at Nordea, who conducted the analysis, adds: “As part of the WCM Advisory team I regularly talk with companies about their strategy, position in the supply chain and how to leverage on working capital to reach their strategic goals. Unlocking cash tied up in working capital is a cheap way of financing, which is especially interesting in an environment where a gradual rise in interest rates is expected. While it is fascinating to dive deeper into each individual company, we must not forget the bigger picture by looking at overall trends and developments across the market. This study has generated some excellent new insights and also confirmed some of the things we already expected to see, such as the big difference between large and small companies.”
“This difference underlines the importance of embracing the full supply chain and being aware of the effects each course of action has on business partners. While overall levels of working capital have gone slightly up over the last four years, it is interesting to see the huge variation between companies who respectively improved and worsened management of their working capital. It’s especially interesting to see that companies using working capital as part of their strategic agenda have managed to improve working capital without capitalising on their margins. Clearly a focus on working capital should be an important part of every company’s strategic agenda, as it is part of their value creation,” adds Maiken.
Patrik Zekkar concludes: “We believe that working capital is an area that requires repeated study and we are delighted to be able to provide consistent research to uncover trends and try to assess the latest drivers of change. We repeatedly look at working capital over a long time from various perspectives as it is not a one off topic that can be summed up with one piece of research. A different perspective is required as working capital can be seen from various viewpoints, whether you are an equity investor, running a CFO office, a Supply Chain Manager or a Sales person wanting to maximise leverage on the balance sheet, for example.”
For more information please write to Maiken Lausen at maiken.lausen [at] nordea.com (maiken[dot]lausen[at]nordea[dot]com)