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Working capital management: BHEL v/s L&T - Views on News from Equitymaster

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Working capital management: BHEL v/s L&T
Apr 13, 2009

Other than fixed assets, working capital is one of the major areas where a companyís funds get employed. Working capital is nothing but a companyís current assets minus its current liabilities, which gives you the amount of funds required by the company to maintain its daily operations smoothly with a comfortable liquidity position. Depending on the kind of business the company is in, it may either be working capital intensive or not. A working capital intensive business would require the company to pump in large sums as working capital in proportion to the sales each time there is an increase in sales. A business that does not require as much of working capital for every unit increment in sales would thus be considered superior as its requirement for additional funds will be that much lesser as the company grows is size. It is indeed also a sign of management adeptness if it is able to keep the companyís working capital needs minimal.

Keeping the above in mind, here we make a comparison of the major components of working capital of two premier companies from the engineering sector - BHELand L&T. We will have a look at each of their inventory days, debtor days and creditor days over the years and stack them up against each other to see which one has been more efficient on these important metrics.

Components of working capital
Source: Company, Equitymaster

A look at the three individual components of current assets and liabilities, namely inventory days, creditor days and debtor days, shows that L&T scores much better when compared to its PSU counterpart BHEL. Over the years, L&Tís inventory days have been lower, its creditor days higher and its debtor days lower, all of which are favorable for the company.

Part of the reason for BHELís poor showing on these fronts may be due to its PSU nature which ensures a big bulk of government contracts with lengthy execution periods and tardiness in payments. L&T, being a private sector player, has been able to do a better job on these fronts due to faster project execution leading to better inventory management and faster recovery of payments from debtors.

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