A key indicator of corporate efficiency may now be better than at any time since the turn of the millennium.
The net working capital cycle — a crucial measure that tracks the time a company takes to convert current assets like inventory into sales and then collect the money from customers — has seen remarkable improvement.
According to data from the Centre for Monitoring Indian Economy (CMIE), the average company needed nearly 90 days to complete this cycle in 1999-2000.
Fast forward to 2023-24, based on the latest available data, that figure has nearly halved to 47.8 days.
While the 2023-24 figures are derived from a smaller sample — covering 1,011 companies compared to the 3,000-odd listed firms in previous years — they still provide a strong indication of the trend.
The preceding year, 2022-23, saw the working capital cycle shrink to 54.1 days, the lowest since 2005-06.
If the current trend holds, this would mark the shortest net working capital cycle in at least a quarter-century.
“The higher the use of technology, the better the use of working capital,” says Deven Choksey, managing director at DRChoksey FinServ.
The increase in online payments, which can clear transactions in seconds compared to the days required for cheque payments, has contributed significantly to the reduction in the working capital cycle.
Additionally, increased formalisation and government initiatives aimed at shortening payment timelines for smaller businesses may have further accelerated this shift, Choksey suggests.
He believes the working capital cycle is only likely to improve further.
Data analysis from recent years shows a decline in every component of the working capital cycle since 2018-19.
The raw material cycle has decreased by 1.5 days, and the finished goods cycle by another 0.5 days.
However, the most significant improvement has been in debtor days, which represent the time required to collect money from customers.
Debtor days have fallen by 13.8 days since 2018-19.
Also, companies are settling their debts faster, with creditor days down by more than a week.
These efficiency gains coincide with improved profitability. Profit growth for companies in the Nifty 500 index was around 30 per cent in 2023-24, against single-digit growth recorded during the previous year, according to the June 2024 Indian Strategy report from Motilal Oswal Financial Services, authored by research analysts Gautam Duggad, Deven Mistry, and Aanshul Agarawal.
However, the current earnings season, reflecting the first quarter of 2024-25, has been lacklustre, notes Satish Menon, executive director at Geojit Financial Services.
Menon suggests it may take longer to discern the year’s trend.
“We'll have to wait for the second quarter,” he says.
Working capital can play a larger role in profitability during downturns, according to a 2014 study titled The impact of working capital management on firm profitability in different business cycles: Evidence from Finland by Julius Enqvist of Nordea Bank, Michael Graham of Stockholm University, and Jussi Nikkinen of the University of Vaasa.
It found that “working capital management is relatively more important in low economic states than in the economic boom state.”
© 2024 Rediff.com -