Working capital cycle is the time taken by an entity to convert funds invested in the day-to-day matters of a business to cash
There are various ways to assess a company’s financial health. Working capital cycle (WCC) is one of the most important ones. WCC is the time taken by an entity to convert funds invested in the day-to-day matters of a business (in inventory, debtors, creditors) to cash.
More often than not, a low WCC improves cash flows but also yields better return ratios.
(Working capital cycle (days = Stock days + debtor days – creditor days)
To study WCC trends in FY18 vis-à-vis FY17, we shortlisted BSE companies that fulfill all the following criteria:-
2 – Debtor days declined YoY
3 – Creditor days increased YoY
Only 168 companies met every condition stated above. Of this, 34 delivered over 100 price return in the last 2 years.
Of these 34 stocks, 8 witnessed a minimum upside of 100 percent in 1 year as well as a 2 year period.
Stock days: This is an indicator of how a company manages its inventory of raw materials (manufacturers), purchased goods (particularly in case of trading businesses) and finished products.
Stock days = (Closing stock / cost of goods sold)*365
Debtor days: This indicates the pace at which a company recovers dues from its debtors.
Debtor days = (Debtors / net sales)*365
Creditor days: This indicates the period taken by a company to pay dues to its creditors.
Creditor days = (Creditors /cost of goods sold)*365Follow @riteshpresswala